Want to have a mortage that lasts forever? Believe it or not, that’s the enticement being used by a particular bank at the moment: sign up for your “everlasting mortgage”. That doesn’t sound very enticing to me, but when you look into the product then it could be something that suits you – if you’re aware of the catches.
A while ago I wrote a piece about the difference between a line of credit or home equity loan and what I’d simply call a regular mortgage. To recap, a line of credit is basically a loan for a property (or some other investment) that works like a big credit card – fortunately with lower interest rates though. In effect, you are usually only required to make interest repayments each month, although some lenders expect you to also make progress towards paying off the principle – but the repayments are certainly structured based only on the interest amounts, and this can vary depending on the balance of the loan.
In the mortgage media this week, there’s been a fair bit of chat about the ING Direct interest only home loan. The bank is said to be cashing in on the crisis of housing affordability in Australia by offering “never-ending mortgages” which are interest only loans. In other words, you may never have to make a repayment of your principle – as long as you continue to make interest repayments every month, the theory goes (so the bank says) that you could later sell your property again and make a profit, without having to pay any of it off. ING is saying this is different from current equity loans because with their product, they are never going to ask you to pay off any of the capital amount – they’re only interest in getting the interest from you.
As some commentators point out, this only works for the property owner if housing prices continue to rise (and according to some, at a rate of at least 7% per year) – otherwise you might end up making a loss when you sell your property. As I’ve written about before, these kinds of loans are not for everyone. But it’s an interesting development in the Australian mortgage market and it will be intriguing to see whether other banks follow up with similar products, and whether the interest is there amongst Australian mortgage consumers to actually get involved in these deals as a solution to the housing affordability problem.