‘Like going to a casino’: More home buyers turn to risky strategy

The number of home buyers taking out steeper loans to finance mortgages on much smaller deposits has jumped in a sign of fresh eagerness to get into the property market.

Latest research shows that 9.2 per cent of new loans for owner-occupiers have a loan to valuation ratio (LVR) of 90 per cent or higher as of the June quarter, up from 6.1 per cent a year ago.

Investors are also borrowing big, with 3.22 per cent of loans having the same LVR – up from 2.3 per cent over the same period.

“In the past, people used to wait until they’d saved enough to have a good deposit, but now they’re very keen to get into the market as soon as possible as they see rising values as a way to create wealth,” said Justin Doobov, managing director of mortgage brokers Intelligent Finance.

“Also, a house worth $1 million today they know could be worth $1.3 million in three years’ time when they’ve saved enough, so they want to avoid missing out. Already, they’re being squeezed by rising property prices and the cost of living, so it’s not so easy to save up a decent deposit, either.”

The new data has been published by CoreLogic, using figures released by the Australian Prudential Regulation Authority (APRA). It shows that high LVR loans peaked in December 2020 then fell steadily until suddenly sharply rising in December 2023.

CoreLogic economist Kaytlin Ezzy says one of the main reasons LVRs are rising for both owner-occupiers and investors is that the serviceability of borrowing has shrunk as a result of the high-interest rate environment.

“Borrowing capacity has become more pinched, particularly at a time when asset prices are still rising,” she said. “House prices continue to set new records so finances have become incredibly tight for many people.”

Owner-occupiers have also been increasingly taking up the federal government’s first home guarantee scheme, whereby an eligible buyer can secure a home with a deposit as small as 5 per cent without paying costly lenders mortgage insurance. Instead, up to 15 per cent of the housing cost is guaranteed by Housing Australia on behalf of the government.

“Investors are, in addition, being strongly motivated by the prospect of capital gains, so are weighing up the downside of raising only a small deposit and taking out a larger loan with the advantages of getting into the market earlier,” Ezzy said.

“A lot of people are trying to get in before interest rates might be lowered as then they expect an uplift in home prices as more people attempt to buy as a result.

“They’re pricing the prospect of a rate cut into their investing decisions. Potentially, maybe people are becoming more used to the high-interest rate environment, too, and they’ve had the benefit of the government tax cuts which has helped some to jump in.”

Mortgage broker and founder of Two Red Shoes, Rebecca Jarrett-Dalton, says she believes the main reason high LVRs are rising are simply that banks now allow it, previously having been much more restrictive with conditions for granting mortgages.

“A number of the major banks are now permitting it, with the Commonwealth Bank allowing buyers to now borrow up to 95 per cent,” she said. “As well, the first home guarantee scheme has proved incredibly popular.

“People are so keen to get a foot in the market that, even if they can’t afford to buy something suitable to live in, they’re buying an investment property instead with a high LVR. They’d rather be in the market, no matter what, than not.”

That wide range of first home buyer incentives is undoubtedly fuelling this trend, agrees Nerida Conisbee, Ray White chief economist, but bank competition may also be contributing.

“It is likely that strong competition within the banking sector is another factor,” she said. “It’s encouraging them to lend to people with lower deposits, while higher prices may also play a role. Buyers may only be able to provide a low deposit to get into their suburb of choice.”

The problem for low-deposit buyers is that many are banking on prices continuing to rise, but a slowdown or fall in property prices risks creating a major difficulty.

“In some ways, it’s like going to a casino and expecting your number to always come up, and not realising that sometimes you can lose money in that game,” Doobov said.