An unintended consequence of low-deposit home loans could be bankruptcy when property values drop. Banks can pursue you mercilessly if misfortune strikes.
Case No. 1
In 2017 a customer of Westpac fell $10,753 behind on the mortgage payments for his St Marys Bay house. Westpac published a notice ordering him to remedy his defaults by paying the arrears plus costs of $1,250.
In addition, Westpac demanded he reduce the amount owing by paying down $477,500 of the mortgage.
This followed Westpac getting a valuation for the mortgaged property, which valued it at $955,000. The amount outstanding on the mortgage was $1,154,749, nearly $200,000 more than the property’s current value.
To return the mortgage to no more than 70% of the property’s [reduced] value, Westpac gave him a month to reduce the amount outstanding by $477,500.
Comment: We are unclear whether the property had genuinely gone down in value, or whether the valuation and/or purchase price when obtaining the mortgage some 3 years earlier was inflated.
Case No. 2
Another Westpac customer failed to meet her mortgage obligations on two Auckland properties.
Westpac sold the properties but got less than the amount she had borrowed so issued bankruptcy proceedings against her.
The High Court case concluded recently in Westpac’s favour. The customer was bankrupted and Westpac won a judgment for the shortfall between the proceeds of the mortgagee sales and the amount owning.
Comment: Westpac appears to have followed proper procedure in selling the two properties by way of tender, which resulted in competitive tenders for both properties and sale prices higher than the expert opinion of the valuers.
The dangers of low-deposit home loans
Using low-deposit home loans to buy property leaves little margin for error should property values decline.
The popular assumption is that prices can fall 10% before those with a 90% mortgage are in deep @#%&. But these cases show the bank has the power to demand you reduce the mortgage to maintain the 90% loan to value ratio.
If a first-home buyer buys an ‘affordable’ Auckland home for $650,000 and values subsequently fall by 10%, the bank could then call on them to stump up an extra $58,500 to reduce the mortgage back down to 90% of the property’s new value.
If you fail to pay, banks have demonstrated they can aggressively pursue you if they so choose.
Be wary, and be warned!
IMAGE CREDIT: TAMARA VONINSKI TVZ