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Rising interest rates and falling home prices cause problems for home buyers -

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ANDREW OLLE: Paul Keating says our low-inflation recovery will take a bit of getting used to, and he might be right, especially among people who thought they could count on a rise in the value of their family home to get them out of bother if the mortgage becomes too much to handle. In many places, home prices already are falling behind inflation, and soon some Australians could find themselves in real trouble because of the special loans they took on. And some of the country's more aggressive lenders, again, may have cause to reflect on the wisdom of their lending policies. Here's Lindy Magoffin.

JACK JANKOVICH: I think the difference between the repayments at the capped rate and the repayments at the variable rate were in excess of $150 a week, which was something we simply weren't prepared for.

LINDY MAGOFFIN: Jack Jankovich and his wife, Sally, tell a familiar tale. They know they could have done their homework more thoroughly but they simply didn't realise how difficult it would be to repay what turned out to be an extra 3 to 4 per cent.

Can I ask you both: Did you, at any stage, think about walking away from the home, selling the house?

SALLY JANKOVICH: Oh, I think it's crossed both of our minds but we haven't really seen it as an option because I don't know that we'd actually recoup - with the slump in the market - I don't know that we'd recoup our costs anyway.

JACK JANKOVICH: Oh, we'd recoup our costs. What we might not do is be able to walk away with sufficient funds to buy a house that would suit our requirements. It was never really a viable alternative.

LINDY MAGOFFIN: Sally and Jack Jankovich are more fortunate than many. They had enough cash invested in their home to make refinancing a viable proposition.

RICHARD NOTT: People who are borrowing 95 per cent of the house, currently, should be the exceptions; people that have a very good job, have a chance of putting a tenant in, probably staying at home with Mum at the same time till they build up an equity in the house.

ALAN OSTER: We basically do not lend more than 80 per cent of the value of the house at the time, and I think, to the extent that we've had negative net equity - that is, some people getting into trouble on their home loan - it's very much concentrated and restricted to people that have gone out and essentially borrowed more than 95 per cent or as much as 95 per cent or more, the value of the property. So that's high-risk lending and it always has been.

LINDY MAGOFFIN: In a very blunt statement a year ago, the Reserve, the supervisor, said the banks needed to be more careful, more prudent in their home lending. With house prices and wages not increasing as they had in the past, the bank warned that borrowers and lenders could have problems.

Since then, the number of home loans has fallen but many lenders continue to offer deals to people with very little cash up front and at very low rates to start with.

JACK JANKOVICH: It's probably much better. Well, it's not probably much better. It very definitely is better, I feel now, with the benefit of hindsight, to be paying the same rate that one is going to pay much later, at the beginning, so that there are no unpleasant shocks. Interest rates are always going to fluctuate a little, here and there, but to suddenly be faced with a massive increase such as happened for us - well, massive relatively - was very difficult to cope with.

LINDY MAGOFFIN: The Prime Minister, Mr Keating, warned earlier this week, that the days of boom and bust are over, that those people expecting to see the value of their houses rise by 10 per cent a year were going to be disappointed.

And not long ago, the Real Estate Institute of Australia said Australians could no longer regard their houses as tradeable commodities capable of generating substantial wealth. It's a message the lending institutions and consumers have yet to take on board.

RICHARD NOTT: With the spike in interest rates that's happened since they've come off the 6 per cent housing rates, there's been an increase, a significant increase in debt servicing, and coupled with that we've seen a dramatic drop in property values due to oversupply. So people are suddenly facing big repayments and a loss of perceived or actual equity in their property. And this is causing a big increase in the number of arrears in property loans.

LINDY MAGOFFIN: And for Jack and Sally Jankovich, if any other part of the puzzle had gone missing, their situation would have been calamitous.

JACK JANKOVICH: If something disastrous were to have happened to me and the house would have to have been sold, if my income had disappeared and we had to sell the house, the fact that the house was actually reducing in value and the interest rates were increasing in value meant that the prospect of having to sell the house and find something that suited our needs was a very worrying one.

ANDREW OLLE: Lindy Magoffin and the shaky Australian dream.