High loan-to-valuation mortgages cause for concern
As competition to write new home loans grows, research from financial comparison site RateCity shows lenders are loosening the belt on lending valuation ratios.
The Australian Prudential Regulation Authority (APRA) has already raised its concerns. It monitors closely the value of new lending at high loan-to-valuation ratios (LVRs). Since 2010 there's been an increase in new lending at LVRs above 90%, particularly in the new quarter.
"It is important for ADIs [approved deposit-taking institutions] to ensure that new borrowers are able to service debt and afford higher repayments when interest rates rise from current record low levels," it said.
According to RateCity's database, 73% of home loans have an LVR of 95% or higher, up on last year (68%) and significantly higher than the lows of 2010 (49%). All the major banks now offer home loans with up to 95% LVR. Westpac goes as high as 97%.
While it is possible to borrow up to 100% of the value of a property, Alex Parsons, CEO of RateCity, says it's not necessarily the wisest option.
"The biggest risks in low-deposit loans are taken by the borrower, not the lender," he says. "You'll almost certainly have to pay lenders mortgage insurance because your deposit is small and, most importantly, you now have a much larger debt."
Regulators in other countries, including Sweden and New Zealand, require banks to hold more capital against mortgage exposures.
ASB New Zealand, a subsidiary of the Commonwealth Bank, withdrew all pre-approved high-LVR loans not used by October 4. It asked those customers affected to either save for a bigger deposit or look for a cheaper house.
In Australia, Steve Batten, of the Commonwealth, says it maintains sound criteria and risk management approaches to its lending decisions.
"We incorporate a buffer of 1.5% as well as factor in 'costs of living'. In fact, we currently have two key criteria that we look at, with the one that requires a higher buffer applied to ensure that we do not extend credit that is unlikely to be serviced."
While Aussie banks have strong lending practices, is a buffer of 1%-2% on current standard variable rates enough?
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