Home loan rates at record low: Could tougher lending rules shut out first homebuyers?

While competition remains fierce in the Australian home loan market with plenty of good deals around, lenders are pulling the reins in on which borrowers can access their lowest rates.

For a number of lenders, those restrictions come in the form of loan-to-value ratios (LVR), with AMP Bank being the latest to make a move here. 

For context, LVR refers to the percentage of property value you’re borrowing from the bank. The higher your LVR, the lower your home deposit. 

AMP Bank this week made a change so that instead of just having four loan amount tiers, variable interest rates would now also be determined by LVR.

It’s a small switch in gears, but significant for borrowers with higher LVRs, as it means that while they would qualify for AMP’s Variable Rate Loan (Professional Package), they may now be excluded from the best rates on offer. 

So for owner-occupiers making principal and interest repayments, here are the new tiers to be aware of: 

If you’re borrowing $500,000 up to $2.5 million… 

• The lowest rate available is 2.69% (3.10% comparison rate*), which you can only snag if you have an LVR below 80% 
  
• But if your LVR is 80% to 90%, then the rate on offer jumps by 17 basis points, to 2.86% (3.27% comparison rate*).
  

If you’re borrowing $100,000 up to $490,000… 

• With a LVR below 80%, rates start from 2.73% (3.14% comparison rate*) 
  
• But if your LVR is 80% to 90%, then the rate rises by 16 basis points, to 2.89% (3.29% comparison rate*). 
  

Mozo’s property and lending expert, Steve Jovcevski said AMP’s new system could be driven by growing concerns around property valuation as prices fall across Australia. 

“They’re worried about being stuck with people with negative equity. For example, if they give someone a 95% LVR loan but property prices subsequently drop by, say, 10%, then the risk is that if the customer defaults and doesn’t pay their loan, the bank would have to wear the difference,” he said. 

“There’s also a higher risk of customers defaulting, given all the job losses and the fact that we’re in recession right now. So it’s all about protecting themselves and lowering their lending risk.”

Lower rates, higher barriers

AMP isn’t alone in its concerns. Since the emergency Reserve Bank cut to 0.25% back in March, 15 home loan lenders in the Mozo database have tightened their LVR requirements. For instance: 

• Newcastle Permanent now offers owner-occupiers rates starting from 2.72% (2.76% comparison rate*) on its Real Deal Home Loan - but only if you have a LVR below 80%. If your LVR is 80% to 95%, then your rate rises to 3.09% (3.13% comparison rate*). 
  
• Bank Australia has made a similar move with its Basic Home Loan. The rate it offers to owner-occupiers with a LVR under 70% is 2.85% (2.89% comparison rate*), while the rate available for a LVR under 80% sits at a much higher 3.20% (3.24% comparison rate). 
  
• Athena has taken a more straightforward approach of reducing its maximum LVR across the board from 80% to 70%. This means refinancers wanting to switch to its Variable Home Loan will need to have at least 30% in home equity instead of the previous 20%. 
  

“Seventy per cent LVR is the new 80% LVR,”  Jovcevski said.

“Some people have been predicting a 10% property price drop, so essentially the lenders are factoring in that 10% drop and making their maximum LVR 70% instead.”

He added that the trend of banks introducing stricter LVR criteria may continue for a while, at least “until this whole COVID situation starts to blow over or if they start to see that property prices are tracking up again and there’s a bit more security.”

Silver lining for first homebuyers 

But it’s not all bad news. 

Jovcevski says with less demand in the market, first homebuyers could find there’s more opportunity to negotiate down property prices and snag a better deal.

“They may pay a higher rate [with a smaller deposit] but at the end of the day, if they’re saving, say, $50,000 on the property, then the difference in interest wouldn’t be too much until they're able to refinance,” he says. 

“It’s not an easy time for first homebuyers in terms of getting a loan, but it is an easier time to buy a property, so that’s the tradeoff.”

For first homebuyers keen on securing a cheaper home loan, Jovcevski recommends “saving as much of a deposit as they can."

“Because prices aren’t going to skyrocket any time soon, they’ve got a bit of time to do this.”

Right now you could also take advantage of the First Home Loan Deposit Scheme. Under this scheme, first homebuyers with at least a 5% deposit can avoid paying Lenders Mortgage Insurance (LMI), thanks to a government guarantee. The second round has just opened, with 10,000 spots up for grabs. 

Check out our article on how to secure a spot, or scroll down below to start comparing your home loan options today.