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Extended Homes Loans - Cheap & Dangerous
At its best, a home equity loan is one of the cheapest forms of personal finance you can obtain. At its worst, it is a step down the path of losing your home. THE banking ombudsman Susan Brooks has warned people considering home equity loans to fully understand the risks before extending their home borrowings. The heavily marketed home equity loans, which promise easy access to finance for the purpose of extending homes, building pools or buying cars, effectively let people get hold of the increased value of their homes by boosting their borrowings.
Brooks told Money Extra that one danger is some banks do not look closely enough at the capacity for new co-borrowers (perhaps partners of existing borrowers) to repay the additional debts incurred through such loans.
She says people considering a home-equity loan should pay particular attention to whether the lender rolls the new home-equity loan together with the home loan so that the new borrowings cannot be discharged faster.
In most cases home-equity loan interest rates (after fees and special introductory offers) are around 1.5 per cent higher than standard home loans. Home-equity loans also have an upfront fee of between $500 and $1000 and a monthly fee of between $3 and $5.
Brooks says when taking out these loans, people must look at their capacity to repay: "Is the loan going to be used for home improvements, a car, or is it refinancing debts? They don't look at the repayment capacity of the co-borrower and some banks could leave themselves vulnerable to their own duty of care." Brooks said that the situation with home-equity loans is not dissimilar to the introduction of fixed-rate loans, where people were not fully aware of the costs of withdrawing from such a loan early (particularly when interest rates fell).
"If everything is done right they are a good idea but . . .
education is needed to be given to bank staff selling the products and for the customers themselves."
At its best, it seems, a home-equity loan is one of the cheapest forms of personal finance you can obtain. At its worst, it seems to be a foot-step down the path of losing your home.
The biggest danger when taking out a home-equity loan is that you will almost certainly increase your overall debt. A conscious, informed decision is required about your ability to repay. Just because your home has increased in value, it does not mean it is a good idea to borrow more money.
The number of home-equity loans sold in Australia has boomed in the past five years. They have been marketed aggressively by banks which have understood that home-equity loans are essentially personal loans that carry the financial security of your house. The loans have been marketed for people wishing to add renovations to their homes, for those seeking to buy investments and even occasionally to those wishing to consolidate debts with higher interest rates into their home loan. The banks have the comfort of knowing that if the investment or persons' lifestyle is a financial failure, the family home can be used to pay back the obligation to the bank.
In fact, the banks these days encourage people to take out a home- equity loan before taking out a personal loan the reason being that they then have greater security and you a cheaper interest rate.
While a home-equity loan is one way for people to unlock value from their home, the other method is to use features such as Westpac's Options, the National Australia Bank's Redraw or Citibank's Choices.
These, and others marketed by the banks, let you to have access to extra payments you have made on your home loan. You can also invest spare savings into your home loan, therefore effectively getting an after-tax saving that is equivalent to the home loan interest rate . . .
something which for most people is considerably better than the after-tax return from an investment account. If you wish to withdraw money, some banks charge a small fee. Mind you, with this system you "reborrow" only money that you have already repaid. The overall loan cannot increase beyond what you initially borrowed.
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