A study of more than 3,000 potential mortgage customers has found an alarming number of people are opting for bigger loans with smaller deposits.
The study by comparison website RateCity revealed more than a third of would-be buyers are looking to enter the property market with 5 per cent deposit or less (LVR of 95 per cent or higher).
“The strategy puts borrowers on a collision course with banks who are increasingly tightening the belt on mortgage lending criteria,” the report said.
The study found that one in eight potential borrowers have no savings at all.
Sally Tindall, money editor at RateCity, said banks and the government banking regulator APRA are at “loggerheads with borrowers”.
“While banks are offering sweeteners to borrowers with big savings, these figures show that some borrowers are clearly entering the market before they are ready,” Ms Tindall said.
“A lot of buyers are also overstretching – in the past five years, the average mortgage has increased 23 per cent,” she said.
“Not only is this a risky strategy, it’s also a much more expensive way to borrow – small deposits attract higher rates on top of lender’s mortgage insurance.
“For example, a person with a 20 per cent deposit for a $400,000 purchase starts with a mortgage of $320,000. Someone with a 5 per cent deposit starts with a loan of $380,000, plus they’ll need to come up with an additional $13,000 or more for LMI. Being this far behind from the outset means they’ll be paying an average of $63,000 extra over the course of a 30-year loan in interest, plus the extra $13,000 for LMI.”
A separate RateCity survey found that one of the most important attributes people were looking for in a home loan was the ability to make the lowest possible repayments.
“Our study found that people are looking for home loan products that allow the smallest monthly repayments, along with maximum borrowing amount and maximum LVR,” Ms Tindall said.
“Repaying your loan as slowly as possible, when you’re already overstretched is far from ideal,” she said.
“Not only will you pay significantly more in the long run, if rates do increase, which is extremely likely over the course of a 30-year loan, you may find yourself defaulting on your home loan.”