Deposit? You're Dreaming

Sydney Morning Herald

Wednesday November 19, 2008

Jacob Saulwick

THE "no deposit" home loan is about to become a thing of the past, as the big banks tighten the screws on new borrowers.

The Commonwealth Bank yesterday told mortgage brokers that it would stop offering zero deposit home loans, in which borrowers can access loans and only need to pay for legal fees up front.

The move by the country's biggest lender follows the ANZ's decision to restrict loans to 90 per cent of a home's value.

From December 1 the Commonwealth will only lend up to 80 per cent of the value of a home without mortgage insurance. The bank will continue to lend up to 95 per cent of a home loan, but borrowers will have to pay for mortgage insurance.

The Federal Government has doubled the first home owners grant to try to reflate the sagging housing market, but brokers warn that tighter bank credit will discourage would-be buyers.

No-deposit loans have been criticised for enabling predatory lending, by extending credit to customers without the ability to repay. But many of the more aggressive lenders have already departed the market - early victims of the credit crisis - and the shift to tighter standards will add another headwind to the beleaguered sector.

Meanwhile, the Reserve Bank continues to prepare the ground for another rate cut next month. In minutes of its board meeting this month, made public yesterday, the Reserve revealed that its governor, Glenn Stevens, intended to tell board members to cut rates by 0.5 percentage points.

But after the preparation of board papers, he changed tack, suggesting to members that they either cut rates by 0.5 points or opt for a more generous 0.75 points, which they ultimately chose.

Mr Stevens had a similar change of heart before the board meeting last month, at which the board cut rates by 1 percentage point; the planned recommendation had been a cut of halfa point.

The chief economist of JP Morgan, Stephen Walters, said the central bank, which has dragged the cash rate down from 7.25 per cent to 5.25 per cent in three months, was likely to cut rates by "only" half a percentage point next month.

"Having done so in three assertive hops, our view is that officials now probably will move at a more measured pace, with one wary eye on the outlook for inflation."

The Reserve's minutes said 2009 was expected to be the weakest year since 1982 for the richest countries. While credit had recently stabilised, "both housing and personal credit growth were at low levels".

A spokeswoman for the Commonwealth Bank, Nichole Ismay, said of the withdrawal of the zero deposit loan: "We may be able to offer it at a future stage . . . but have taken the view that it is not prudent to offer this product to customers at this time."

Under ANZ's new criteria, borrowers will no longer be able to include mortgage insurance in their loan. That means they will have to provide a 10 per cent deposit, and pay up front for mortgage insurance.

A senior manager at the bank wrote to brokers: "I know this will be a change for us all in a tough market environment, and from a sales point of view I know this can be challenging."

BusinessDay - Page 27

© 2008 Sydney Morning Herald

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