100 Percent Interest Only Home loans: Did they increase the size of your mortgage?

Easy mortgage money including interest only mortgage loans, short term mortgage lending and home loans for 100 per cent of the property's valuation might soon be curtailed 

Boom and bust in house prices: is easy finance the driver? 

Nobody wins in boom and bust property markets, with the exception of savvy property investors, those getting out of real estate during a boom, and maybe real estate agents and mortgage brokers.
When you have winners, there must be losers in the zero sum game of the giant Ponzi Scheme that we have seen operate across the Globe over the past 12 years.
So what's the answer, beside living in a cave or under a bridge?

Home loans that require a saved deposit are best for the majority of home buyers and lenders, and the housing market in general. Three peak economic institutions found that requiring mortgage borrowers to save and provide a decent deposit would moderate future housing booms, and reduce any down side or housing bust. 

The Reserve Bank, the International Monetary Fund and the Bank of International Settlements claim That:

1. Setting maximum loan-to-valuation ratios could help reduce the damage housing cycles cause to the economy. 
2. And that ensuring home buyers pay down their home loan has many benefits including:
1. The Reserve Bank believes that having home buyers amortise their home loans, by having them paying down the loans delivered two benefits. 
1. It lowered the purchase price that a borrower could borrow on, and meant that homeowners gained equity in the property. 
2. And because this would effectively lower the closing price of the home, then it would moderate house prices more in line with earnings. 

Going from renting homes to renting money 

An interest only loan has effectively meant that people have gone from renting their home to renting the money to buy a home. The only thing that changed is the bank is now the landlord?

Interest only home loans are seductive

 Interest only home loans means you never pay off the principal. How could this be of any benefit? Well in lowers the mortgage payments. And that means less commitments [all tax deductible] whilst the property gains capital value as house prices rise. But is that model sustainable going forward? I don' think so.
And home buyers got sold on interest only mortgage payments because of these lower repayments.
And made a more expensive home seem affordable. And made selling a home for more money easy. Soon home buyers were forced to take these loans as they were the only path to home ownership. Again, this was sale-able as long as prices kept increasing.
The problem with that is that home buyers were going from renting homes to renting money.

With the glory days of high returns behind us, people should be buying a home for future financial security. So buying a home with little equity and no amortisation of the principal could mean that home loans could quickly go under water. When this happens then people may just decide to quit their homes. This happened on a large scale in the US and after 4 years, property prices seem to be returning to a path of moderate property gains. 

Property Investors may get caught in low performing investments

Restricting credit by increasing deposit requirements, and snuffing interest only loans may cause a drop in demand, and that may be enough to lower price increases in housing.
If that were to happen, it could mean an exodus in property investors in housing, and that would see both a price crash and an increase in rental demand. But this would only be temporary, and the outlook would be more affordable housing and more Australian buying their own homes.

Bank home loan policy can only be controlled indirectly, under current legislation

The fact is that Australia's banks are free to lend as they see fit.
However, the Australian Prudential Regulation Authority [APRA] sets policy on banks setting aside capital to cover loans, presently for more than 80 per cent of a property's valuation.
SO how can they offer 95% or 100% loans? Easy.
The gap is covered by mortgage insurers. This means that Australian banks are well protected from any downside in property bubbles, and can currently bypass this safe guard.
Can you imagine how less we would be paying for homes if home buyers had to come up with a 20% deposit?
Banks are also free to make interest-only loans. 
In fact this has been a big selling point with many home loan scenarios, including 5 year and ten year interest only loans that convert to Principal and interest repayments later to ensure the loan is paid down.

Its interesting that a big player in this type of loan has recently seen big drops in its share value. If we move to this new model I see moderate house prices for the future and that would make it less attractive for investors. 

Will the Government move to offer first time home buyers on low incomes tax deductions?

So maybe we should see Governments moving to tax deductions for first time home buyers on low incomes. 
This would improve housing demand for smaller, low cost housing, and that is where any housing shortage will be most felt. Did "easy to get home loans", "interest only home loans" and "100% mortgage financing" increase the demand and therefore the prices of your current home, and the land it was built on?
The answer would have to be yes.
So any credit restrictions will have a reverse effect. Fortunately we have been restricting home loan credit in Australia before the the GFC compared to the US, and since the GFC we have restricted lending further. So any further restrictions will moderate capital gains in residential real estate further, and that could see reductions in people using property to build wealth.
So maybe the Government has to fill the gap by empowering low income earners to buy smaller homes and allow them to build modest wealth and financial security by giving them tax breaks on their home loan interest.