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Are banks involved in risky lending?


Laine Gordon

Laine Gordon

3 min read

Lenders are proving more willing to lend to people with less deposit or equity than since the onset of the global financial crisis, new research from Australia’s leading financial comparison website, RateCity (www.ratecity.com.au), has found. 

By increasing the ‘loan to value ratio’ (LVR) on mortgages, many more potential borrowers are eligible for loans than has been the case for the past five years, according to the study.

LVR is the maximum mortgage offered as a percentage of a property’s value. For example, if the value of a home is $400,000 and the maximum LVR is 95 percent, a borrower would be eligible to borrow up to $380,000, implying a deposit of $20,000.

August figures show 73 percent of home loans in the RateCity database have an LVR of 95 percent or higher (or 5 percent deposit or less), which is slightly up on last year (68 percent) and significantly higher than the lows of 2010 (49 percent).

Alex Parsons, CEO of RateCity, said it’s now possible to borrow up to 100 percent of the value of a property and that the majority of loans require a borrower to have saved just 5 percent deposit.

“Lenders are loosening the belt on home loan criteria meaning many more potential borrowers are eligible for loans that may not have been approved in the past,” he said. “All major banks now offer home loans with up to 95 percent LVR.”

The recent pick up in the mortgage market has caught the attention of the regulator, with the Australian Prudential Regulation Authority last week calling on banks to maintain lending standards as competition to write home loans grows.

“With the regulator keeping a close watch we expect banks to start tightening the belt in coming months, as has been the case in New Zealand following its central bank’s (RBNZ) move to curb the number of high LVR loans written,” he said. 

To meet the RBNZ’s imposed ‘speed limits’ the Commonwealth Bank’s NZ subsidiary, ASB, will withdraw pre-approvals for high LVR loans not used by October 4, asking customers to either save for a bigger deposit or look for a cheaper house. 

Parsons added that while the higher LVR loans offered a way into the market for some customers, there were risks for borrowers.

“While it’s possible to borrow up to 100 percent of the value of a property, it’s not necessarily the wisest option,” he said. “The biggest risks in low-deposit loans are taken by the borrower, not the lender.

“There’s an obvious temptation to jump into the market if an institution will lend you 95 percent of the property’s value. Remember, though, that you’ll almost certainly have to pay Lenders Mortgage Insurance (LMI) because your deposit is small, and most importantly, remember you now have a much larger debt.

“Any increase in interest rates, or a reduction in your income, has a much bigger impact because you have a larger mortgage,” he said.

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