Hidden risk in Australia’s home loans as high risk lending grows

Australia’s housing market is being increasingly propped up by risky lending as interest rate cuts encourage banks to take on higher leveraged loans – and it could leave homeowners paying more.

Analysis of APRA figures revealed loans to home buyers with fractional deposits of less than 5 per cent surged to record levels over the 12 months to August.

Lending to those with small deposits under 5 per cent hit $14.2 billion over the period, according to the analysis by Primara Research and investment property group Our Top 10.

This was 167 per cent higher than levels reported in 2019 and ultra-high loan-to-value ratio mortgages now represent 2.1 per cent of the total lending market.

This was before the government this month expanded its First Home Guarantee scheme allowing buyers to purchase homes with small deposits and avoid paying lender’s mortgage insurance.

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Experts claim the latest scheme changes could drive exponential growth in the number of homeowners holding properties they have little if any equity in.

Even before the scheme changes, loans for those with deposits under 5 per cent were the number one growth area in mortgages.

There was a 20 per cent uptick in loans to those with small deposits over the past year, outpacing the 15 per cent rise in lending activity overall.

Our Top 10 CEO Simon Ma said the figures pointed to a lending industry getting more comfortable with risk.

“Banks are clearly willing to take on more risk to win customers in this competitive environment,” Mr Ma said, adding that first-home buyers with low deposits needed to know what they were getting into.

“A (5 per cent deposit) means you’re paying interest on significantly more borrowed capital,” he said.

“The monthly repayments are higher, and the total interest paid over the life of the loan can be hundreds of thousands of dollars more than a traditional 80 per cent loan.”

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Mr Ma added that there was a popular misconception that the First Home Guarantee scheme meant government would help buyers with their deposit sizes.

“We’re seeing enormous interest in these 5 per cent deposit loans now that the scheme has launched,” he said.

“Some first-home buyers believe the government is contributing the additional 15 per cent deposit, leaving them with an 80 per cent LVR loan. That’s not how it works.

“Buyers are taking on a 95 per cent LVR loan, borrowing 95 per cent of the property value. The government guarantee simply removes the need for lenders mortgage insurance, it doesn’t reduce the loan size.”

Analysis from real estate agent platform Bright Agent said the Big Four banks typically charged “exorbitant” interest rates for those taking out 95 per cent loans.

Bright Agent compared CBA rates and revealed those with 20 per cent deposits could get a rate of 5.39 per cent but rates jumped to 6.99 per cent on products for those with 5 per cent deposits.

This would result in someone who bought a $1m property paying up to $1800 a month more under certain loan conditions, Bright Agent said.

Bright Agent noted Westpac Group advertised its Flexi First Option Home Loan rate at 5.34 per cent for a 70-80 per cent LVR, which rose to 6.09 per cent for loans above 80 per cent, including those up to 95 per cent.

Bright co-founder Aaron Scott described the rate differences as “price gouging”.

“The 5 per cent Deposit Scheme should be about helping Australians into homes, not helping banks into bigger profit margins,” Mr Scott said.

“This interest-rate disparity is price gouging on a national and generational scale.”

Canstar director of research Sally Tindall said the value of high loan to value ratio loans was rising in dollar terms but as a proportion of all new loans was “relatively” stable – for now.

“The proportion of these loans could start to climb in the months ahead as more first-home buyers take advantage of the expanded scheme,” she said.

“While many first-home buyers are likely to borrow right up to the 5 per cent threshold, what the scheme might do is help prevent some people from borrowing with even less than this, because they don’t have to pay lenders mortgage insurance.”

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