The number of low-deposit home loans in the Australian market has decreased by more than 5 percent in the past year, a sign that banks are becoming more risk-averse in a low-interest-rate environment, new research from RateCity shows.
A low-deposit home loan is one that requires savings of 5 percent, or less, relative to the value of a property and is measured using loan-to-value ratio or LVR.
RateCity research found that these loans now account for 69 percent of the Australian market, down from 73 percent in 2013.
The findings come today as the Reserve Bank of Australia board kept the cash rate on hold at 2.5 percent at its October meeting – steady at a record low for more than a year, and almost four years since the last rate increase.
Peter Arnold, product director, RateCity.com.au said, “We’ve got the cheapest borrowing on record for over a year and the figures show that some borrowers are overstretching the budget. So the banks are starting to take the reins on this matter and some are pulling in the belt before the regulators do.”
“New Zealand banks have had their hand forced and they’ve been regulated to have lower LVRs – meaning bigger deposits as mandatory. We’ve seen a few Australian banks pre-empt this and tighten up their lending criteria and we think we’ll see a little bit more of this,” he said.
“We see this as a good thing in terms of responsible lending, it means that borrowers, especially first home buyers, need to do the ground work and not borrow beyond their means.”
“Regardless of what happens with banks and regulations, really it’s up to consumers to decide how much they can borrow. Don’t take the banks’ word for it, do your own sums and don’t borrow too much.”
The RateCity database shows the average standard variable rates is 5.37 percent, which for a typical home loan of $300,000, means a monthly repayment of around $1800.
“If, or when, we see rates return to historical averages of around 7 percent, borrowers need to be ready to pay an extra $300 on average per month and potentially more than that – that’s a fair amount to handle as other living costs increase, so borrowers need to add a buffer now, get ahead, and prepare early for higher rates in future,” he said.