Unlike the banks in New Zealand, Australian lenders are making it easier to apply for home loans, thanks to increasing loan-to-value ratios (LVRs). According to The Sydney Morning Herald, "Australian institutions appear to be loosening their belts".
RateCity chief executive Alex Parsons says, "many more potential borrowers are eligible for loans that may not have been approved in the past". This is a result of the Reserve Bank of Australia's decision to lower interest rates to just 2.5%. Mr Parsons said 73% of lenders have increased their LVR on mortgages to 95% of the value of a property, making it more accessible to those who previously had difficulty reaching the initial deposit. In 2010, post GFC, only 49% of banks were offering loans with an LVR of 95%.
In New Zealand, due to concern over rising house prices and excessive lending, starting October 1 the Reserve Bank of New Zealand is making banks restrict high level LVR mortgages – which are 80% or more. It will enable it to slow house price growth whilst keeping interest rates low. This type of policy is known as a "macroprudential rule".
Senior economist at Macquarie (ASX: MQG), Brian Redican, says these types of rules will not be implemented here in Australia for a number of years unless they are deemed a success in NZ. "If, however, NZ's adoption of macro prudential policy is deemed a success – and Australian house prices accelerate further – then it is possible that similar rules could be adopted in Australia in late 2014 or 2015", he said.
Potential buyers considering taking advantage of such small deposits should consider three main criticisms of high LVRs. First, if it's not possible to save 10% for a housing deposit will it be possible to pay off a larger mortgage and interest? Second, what would happen if interest rates go higher in the near future, say by 3% or 5%? Lastly, mortgagee insurance will almost certainly be much higher on this type of loan.
Foolish takeaway
Senior economists have hosed down concerns over a property bubble here in Australia. However if the banks continue to offer higher LVRs to buyers whilst interest rates are so low, property prices can be expected to boom.
Many banks have begun to realise the ballooning prices and increased their 'buffers' or stress tests on potential borrowers to make sure they are able to service the loans should things go belly up. As of 1 January 2013, the banks that control the biggest share of the mortgage market are Commonwealth Bank (ASX: CBA), Westpac (ASX: WBC), National Australia Bank (ASX: NAB) and ANZ (ASX: ANZ).
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