Banks and lenders in race to the bottom as mortgage demand slides

Fresh evidence is emerging of a “race to the bottom” among banks and other lenders as demand for mortgages slides and competition boils over.

Lenders are increasingly cutting standards by enabling home buyers to make smaller deposits, new research indicates.

About three in every five mortgage products now enable home buyers to borrow up to 97 per cent of the value of their property, according to financial research group RateCity.

RateCity chief Damian Smith said the rise in loan-to-value ratios (LVR) indicated that lenders wanted to kick-start growth in the sluggish home loan market.

“We haven’t seen this level of money offered to mortgage borrowers since the start of 2009,” Mr Smith said.

He warned that change in lending criteria was putting borrowers at risk.

“There is a concern for some borrowers who take on too much debt, because it makes them more susceptible to risk if rates increase or property values fall.”

Typically, a borrower with a 3 per cent deposit will pay an average variable rate 10 basis points more than someone with a 10 per cent deposit.

High loan-to-value ratios also place banks at greater risk, with the likelihood of a lender absorbing a loss in the foreclosure process increasing as the amount of equity decreases.

Similar borrowing practices were behind the collapse of the US housing sector when people with a higher chance of defaulting on on their payments were provided loans at higher-than-normal interest rates.

For its research, RateCity studied more than 2500 mortgage products and found that 62 per cent offer high loan-to-value ratios, compared with 54 per cent of products just five months ago.

And major lenders are among those “loosening the belt”, the group says, citing an increase in loan-to-value ratios from 90 to 95 per cent for “almost all” products at ANZ, among examples.

An ANZ spokesman said a loan-to-value cap of 90 per cent remained in place for all new borrowers, but existing customers with strong credit histories were able to re-finance at higher ratios.

According to RateCity, the Commonwealth Bank now offers mortgages with loan-to-value ratios of up to 97 per cent on most loans, while National Australia Bank continues to offer 90 to 95 per cent of a property’s value.

Nomura banking analyst Victor German said lending standards broadly appeared to be weakening, but it remained the exception to the rule for home buyers to borrow as much as 95 per cent of the value of their properties.

Article: http://www.news.com.au/money/banking/banks-and-lenders-in-race-to-the-bottom/story-e6frfmcr-1226070652292#ixzz1PIMKXFIw