June 10, 2011
Most prospective home buyers are advised to save at least 10 percent deposit for their future home purchase, but as lenders relax their mortgage criteria and ease deposit pressure, borrowers may be getting in over their heads.
The number of lenders offering home loans with a maximum loan-to-value ratio of 97 percent – loans that need only 3 percent deposit – has doubled since January.
Of the big four banks, Commonwealth Bank offers up to 97 percent LVR on most of its home loans. ANZ has increased almost all of its home loans from 90 percent to 95 percent LVR, NAB still offers loans with between 90 and 95 percent LVR, while Westpac has a maximum of 92 percent LVR on its loans.
A change in LVR can greatly impact the value of the property you can purchase. For instance, if you have a $50,000 deposit on a 90 percent LVR you would be able to borrow $500,000. But for a loan with a 95 percent LVR you’d have access to a $1 million loan.
Damian Smith, chief executive of RateCity, said the banks’ move to loosen LVRs is a good sign that they are keen to kickstart a sluggish mortgage market.
“The RateCity database shows that the proportion of home loans with a maximum LVR of 95 percent and above make up 62 percent of all home loans. This is 8 percentage points higher than in January 2011,” he said.
This level of money hasn’t been offered to mortgage borrowers since early 2009, Smith said.
“Lenders are trying to kickstart growth in the mortgage market, and more generous LVRs and lending criteria are the key tool they use,” he said.
While there are still no home loans that offer 100 percent LVR, the proportion of mortgages with a 95 percent LVR has increased 6 percentage points in as many months to 57 percent of all home loans, according to RateCity data.
The real price of a high LVR
Mitchell Watson, financial analyst at Canstar Cannex, said in the last 12 months at least 25 lenders have eased their deposit requirements and increased LVRs to assist borrowers into the market. But he warns borrowers against overextending financially.
“Just because you can borrow a higher amount doesn’t necessarily mean you can service the loan,” he said.
Smith agrees adding that while some lenders offer mortgage customers more money to borrow, they are likely to find a cheaper deal and have more option if they have a bigger deposit.
“There is a concern for some borrowers who take on too much debt because it makes them more susceptible to risk if rates increase or property values fall. That’s why lenders tend to offer more expensive home loan deals to high LVR loans,” Smith said.
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