First home buyer warning

8th of September 2012 | by RateCity Staff

Would-be homebuyers are being urged not to overstretch their budgets in light of new data, which shows some lenders are loosening the belt in time for the spring mortgage season.

RateCity figures show that almost 3000 home loans cater to borrowers with as little as a 3 percent deposit.

Michelle Hutchison, spokeswoman for RateCity, said one of the main levers lenders use to stimulate the mortgage market is loan-to-value ratio (LVR). In simple terms, LVR means the amount a lender will let you borrow compared to the value of the property.

"Many lenders are doing everything they can to attract home buyers this mortgage season and that include easing their lending criteria by offering home loans which require smaller deposits – effectively increasing your borrowing capacity," she said.

For instance a borrower with $40,000 in savings, and a home loan with a 90 percent LVR, could be eligible to borrow up to $360,000. With a home loan with 97 percent LVR – or just 3 percent deposit – the same borrower could be eligible for as much as $1.29 million, RateCity calculations show.

"While it can be very tempting to increase your borrowing budget when you are offered a bigger loan size for the same deposit, you need to consider the difference in repayments, which would be thousands of dollars more per month, not to mention the sheer amount of debt being taken on," she said.

Borrowers with a larger deposit have greater choice of low interest home loans and are likely to get a better deal, according to RateCity. For instance, a borrower with a 10 percent deposit had access to more than 200 home loans with a rate below 6 percent. While those with just 3 percent deposit had a more limited choice of 36 home loans offering rates below 6 percent.

Furthermore, the biggest risks in low-deposit loans are taken by the borrower, not the lender. It's important to understand the risks, because in the heat of the moment – seeing the ideal house, for example – the logic of numbers can sometimes be swept away, according to Hutchison.

"Many lenders are hungry to lend more money, but always stick to your budget and don't view an offer for a bigger loan as a green light to spend up big. Taking on more debt will sacrifice your equity and leave you far more susceptible to mortgage stress in the future."