No Deposit Home Loans

As this article is written, it has been around 15 years since home equity loans started to receive widespread attention in Australia.

Surprisingly , given how we follow American trends, these types of loans gained much greater and earlier popularity in Australia than in the United States.

Our great love affair with the idea of owning one’s own home was probably peaking through the fifties to the nineties. We were also a nation who got hooked on the idea of using the family home to further our wealth creation efforts.

Much of this wealth creation wave was spurred on by fast talking seminar investment  and wealth creation gurus. They especially seized upon the Government’s negative gearing incentives to entice home owners and property investors to unlock the equity contained within the bricks and mortar of the family home.

The government knew that it could not afford to house a growing population and that it needed private equity funds ( you and me ) to fund the growth needed in Australian housing.

At the same time, banks during the late eighties and the nineties were creating new products to enable them to justify lending ever more money to the nuveau rich and ever more affluent Australia Australian public. The baby boomers grew up and they were richer in assets ( mainly the family home ) than previous generations. Apologies to Richard Kiyosaki  ( Rich Dad, Poor Dad )who contends that a family home is not to be considered an asset.

The new bank equity loans encouraged people to borrow to fund a second or third home and the government incentives sent the market into overdrive. The result was huge capital gains for short periods of time, especially in the capital cities as well as within any decent beach side town along Australia’s coastline.

Like any overheated market, this created a boom and bust cycle of its own making but as long as you had enough cash flow to be able to ride out the troughs your home became a very decent wealth creation vehicle.

The driver of the property game quickly became home equity loans. These loans had initially been available to a limited degree. As banks saw their popularity they began writing many more of these loans and created advertising campaigns built entirely around them. They often morphed into Line of credit loans whereby anyone with at least 20% equity had the possibility of securing such a loan.

The idea of a home equity loan is a marvelous one, so long as the recipient of the loan uses that money wisely. The obvious thing is that it be used for investment and not lifestyle. Though this seems self evident, plenty of people were allowed by plenty of banks to release funds for investment that somehow ended up in part paying for a new four wheel drive.

Even when a home equity loan is used strictly for purchasing an investment property there is still scope for things to go wrong if that property decreases in value. Now of course it could be argued that the property that led to the new property could also drop in value but the difference is that suddenly the ratio of borrowings to assets held can be blown out. When that happens it doesn’t take too much to go wrong before people can find themselves in hot water.

Does this mean you should shy away from home equity loans? Not at all. After all they are a legitimate and powerful wealth building tool and should be used as such. It simply means that you should secure good advice about the home loan product and equally good advice about the investment property you are buying.

To get pointed in the right direction regarding all types of loans including h unlocking the equity in the family home, fill in a few details on our home page here – home equity loans