Banks tighten the screws on small-deposit home loan borrowers

Banks have put the brakes on lending to people with small deposits, according to new research from RateCity.

Banks have slashed the number of mortgage products with a maximum loan-to-value ratio (LVR) of 95% in the past three years. 

Fewer than a third of home loans in the RateCity database now offer lending up to a maximum of 95% of the value of the property.

That’s down from 76% of all loans on offer in early 2015, in line with lending guidelines by the Australian Prudential Regulation Authority (APRA), who want banks to loan with small deposits to be the exception, rather than the rule.

Sally Tindall, spokesperson at RateCity, said the banks were actively looking for deposits of 20%, if not more.

“For Australians battling to crack into the highly competitive home loan market, low-deposit loans have been a doorway in," Tindall suggested.

"But the rules have changed and now borrowers that might have been given the green light three years ago are starting to be turned away."

RateCity research shows that upgrading from a 5% deposit to a 20% deposit on a $500,000 mortgage will require a buyer to stump up an extra $75,000 in cash.

“These new LVR requirements will set a lot of potential buyers back, because they just don’t have access to that kind of money.

“But the alternative is worse. Stretching yourself thin at record low interest rates can be a recipe for disaster.

“It’s been over seven years since we’ve experienced an RBA rate hike and people have become complacent. These new LVR rules will sharpen the focus who is serious about securing housing finance,” Tindall said.