Borrowers likely to struggle accessing low deposit loans

Home loan lenders will likely continue to be cautious of approving applications from borrowers with low deposits.

PropTrack economist Paul Ryan said loans with high loan-to-value ratios (LVR) will remain scarce over the year despite many borrowers struggling to come up with the typical 20% deposit requirements.

“From the period before the pandemic, the share of high LVR loans has fallen 20%, to now be only 7.5% of new loans — and an even smaller share for investor loans,” Mr Ryan said.

The fall in high LVR loans was due to the guidance by the Australian Prudential Regulation Authority (APRA), which set up limits on these high-risk loans.

“Lenders have responded in advance of any formal action by APRA, and to reduce their exposure to any reversals in property price growth,” Mr Ryan said.

With this, Mr Ryan said borrowers will continue to find it difficult to apply for home loans with as little as 10% deposit.

“This makes programs like the Federal Government's First Home Loan Deposit Scheme, where the government guarantees the shortfall of a first-time buyers' deposit, increasingly valuable for those looking to get a foot into the housing market."

The scarcity of high LVR loans is just one of the trends that are likely to play out this year — Mr Ryan said this would also come with increasing interest rates, even with the uncertainty of the timing of the Reserve Bank of Australia (RBA).

The increase will be driven by fixed rates, which would potentially reverse the “unusual” prevalence of fixed-rate loans over the pandemic.

Around 15% of new mortgages were typically fixed rates — this, however, climbed to a peak of almost 50% during the height of the pandemic.

“But with the liquidity support being wound back, the mortgage market is returning to more normal conditions, which has reduced the favourable pricing of fixed-rate products,” Mr Ryan said.

“Expect the share of variable rate loans taken out over 2022 to head back towards three-quarters, despite the expectations that interest rates will increase in coming years.”

Another trend in the mortgage market is the strengthened investor segment — Mr Ryan said around 30% of new lending was to investors.

“Lenders have already responded to the pickup in investors, with increased competition pushing down investor interest rates to their lowest level relative to owner-occupier rates in recent years,” he said.

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Photo by @precondo on Unsplash.