The proportion of people approved for a home loan with a low deposit of 10 per cent or less has almost halved in the past two years.
Experts said it indicated people who were approved for a loan with a small deposit between late 2020 and early 2022 would likely be rejected today – even with the same income and purchase price – because lending criteria had been tightened due to high interest rates and inflation.
“For lower-income families or first home buyers who don’t have the benefit of intergenerational wealth transfer or a parent who might be able to use their equity to help them into the market … they would be more challenged to get into the marketplace when lenders are more focused on larger deposits,” said CoreLogic research director Tim Lawless.
The portion of owner-occupiers who were approved for a mortgage with a loan-to-value ratio of 90 per cent or more hit a peak of 14.1 per cent in the December quarter of 2020, Australian Prudential Regulation Authority data showed. It was elevated from the September quarter through to the March quarter 2021.
Then it tracked generally downward to 6.1 per cent in the September 2023 quarter, and despite a modest rise to 7.6 per cent in December 2023, it remained much lower than during the pandemic property boom.
Buyers who have a deposit of less than 20 per cent are generally considered higher risk and charged lenders’ mortgage insurance, or they may take up government home buyer schemes that waive this extra cost to help buyers under certain income thresholds.
Low-deposit buyers have fallen.Credit: Eddie Jim
“It’s a reflection of lender risk policy. When risk levels are elevated – which they are – at a time of high interest rates, high household debt levels and high cost of living, it makes sense that lenders would be more cautious in their policies,” Lawless said.
He said despite the downturn in banks offering high loan-to-value ratio loans, first home buyer activity was strong, indicating those who were getting mortgages were doing so with either high incomes or help.
“A larger portion of first home buyers that are accessing the marketplace may be using the assistance of some of the government policies like the shared equity framework or low-deposit guarantees,” he said.
“Or they might have a leg-up into the marketplace from a benefactor like the ‘bank of mum and dad’.”
Ray White chief economist Nerida Conisbee said that recently introduced government shared equity schemes, including the federal First Home Owner Grant and other state-based programs, were potentially helping more first home buyers enter the market.
“First home buyers became a bit more active at the end of last year because of all the benefits that are available to them, so maybe that’s why we’ve seen a bit of an up-tick in December,” Conisbee said.
Mortgage broking firm Finspo’s chief lending officer Nathan Taddeo said he had seen an increase in first home buyers using government schemes or family guarantees but also those buying with a small deposit and taking out lenders mortgage insurance.
“We’re seeing day-to-day more first home buyers going over that 80 or 90 per cent level of borrowing,” Taddeo said.
Some first home buyers are able to access help with their deposit.Credit: Peter Rae
Lawless and Conisbee both thought home owners who got a mortgage with a low deposit two or three years ago were likely better off financially now than those who did not – even if they were feeling some short-term pain.
“They’ve probably accrued some equity in their home but in the same sense, they’ve probably been quite financially stretched, given how much interest rates have risen and cost-of-living pressures have certainly been substantial,” Lawless said.
Conisbee said many mortgage holders who bought during the pandemic probably would not have got a loan if interest rates had not been so low at the time.
“Long-term, they’re better off that they bought but short-term, they’re probably struggling a bit because interest rates have gone up so much,” she said.
“Fundamentally, the earlier you buy a property the better, and we have seen price growth so the value of their property – in most cases – would have increased.”
Lawless said there were risks in low-deposit purchases, but he felt the potential benefits outweighed them.
“They’re probably in a better financial position now if they were able to weather the storm, and arguably that pressure should start to come off later this year as interest rates come down and inflation continues to moderate,” he said.
“I think it is a risk worth taking, as long as that risk is managed and anyone looking to get into the market isn’t stretching their budget too thinly.”
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