Mark Twain said, “Buy land young man they are not making any more of it.” Some years later he also filed for bankruptcy.
That happens with booms heading to busts. One sign is the emergence of crazy financing schemes. Remember the inter-generational loans during the Japanese property boom of late 1980s – just before it crashed.
So those who have missed out on the most recent property boom should be wary of the new scheme publicised this week by Wizard, Australia’s largest non-bank lender — not just because it might be harbinger of a crash, but because it might not be a good investment.
There may not be a crash. Normally, people pay a deposit and borrow around 80 per cent of value. The lending institution holds a mortgage (from the old French meaning dead hand). You cannot sell without paying the money back.
It is safe for the bank. It can always put a for-sale sign up and sell for 80 per cent of value within a few days.
But with rising prices, people cannot afford the deposit or repayments. So Wizard comes to the rescue. People need only 70 per cent of the usually deposit and 70 per cent of the repayments. In return, Wizard takes 30 per cent of the ownership (or equity). When the house is sold, however, Wizard takes 60 per cent of the capital gain. Note, not 30 per cent which would match their equity share.
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