Surging growth in high-LVR mortgages raises concerns for borrowers
Australia’s housing sector is experiencing a marked increase in high-risk lending, with recent interest rate reductions prompting banks to approve more loans with minimal deposits. This trend could see many homeowners facing higher repayments, industry experts have warned.
Data from the Australian Prudential Regulation Authority (APRA), analysed by Primara Research and investment property group Our Top 10, shows that lending to home buyers with deposits of less than 5% reached $14.2 billion in the year to August. This figure is 167% higher than in 2019, with ultra-high loan-to-value ratio (LVR) mortgages now accounting for 2.1% of the market.
These developments occurred before the federal government expanded the First Home Guarantee scheme earlier this month, which allows eligible buyers to purchase property with a small deposit and avoid lender’s mortgage insurance.
Experts have cautioned that the expanded scheme could lead to a significant increase in the number of homeowners with little equity in their properties. Even prior to the scheme’s changes, loans for buyers with deposits under 5% represented the fastest-growing segment in the mortgage market. Over the past year, these loans rose by 20%, surpassing the 15% overall increase in mortgage activity.
“Banks are clearly willing to take on more risk to win customers in this competitive environment,” said Simon Ma (pictured right), chief executive of Our Top 10. “A 5% deposit means you’re paying interest on significantly more borrowed capital. 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% loan.”
Ma also addressed misconceptions about the First Home Guarantee scheme, noting that some buyers mistakenly believe the government contributes to their deposit. “We’re seeing enormous interest in these 5% deposit loans now that the scheme has launched,” he said. “Some first-home buyers believe the government is contributing the additional 15% deposit, leaving them with an 80% LVR loan.
“That’s not how it works. Buyers are taking on a 95% LVR loan, borrowing 95% 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 platform Bright Agent indicates that major banks typically apply higher interest rates to loans with 95% LVR. For example, Commonwealth Bank offers a 5.39% rate for borrowers with 20% deposits, but this rises to 6.99% for those with only 5%. According to Bright Agent, this could mean an extra $1,800 in monthly repayments for a $1 million property under certain conditions. Westpac Group’s Flexi First Option Home Loan is advertised at 5.34% for LVRs between 70 and 80%, increasing to 6.09% for loans above 80%, including those up to 95%.
“The 5% Deposit Scheme should be about helping Australians into homes, not helping banks into bigger profit margins,” said Aaron Scott, co-founder at Bright. “This interest-rate disparity is price gouging on a national and generational scale.”
Sally Tindall, director of research at Canstar, observed that while the value of high LVR loans is increasing, their share of total new loans remains “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% 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.”
Want to be regularly updated with mortgage news and features? Get exclusive interviews, breaking news, and industry events in your inbox – subscribe to our FREE daily newsletter. You can also follow us on Facebook, X (formerly Twitter), and LinkedIn.
