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Borrowers hesitant for higher than 80% LVR

As the cash rate heads towards a more normalised setting, borrowers are beginning to think twice about higher loans, according to the home loans marketplace Joust.

The Reserve Bank of Australia (RBA) board moved the cash rate to 1.85 per cent, following a third consecutive 50-bp jump (which followed May’s 25-bp jump), indicating rising inflation is the main cause.

With inflation tipped to reach 7¾ and a cash rate heading towards 2 per cent, borrowers have turned to online comparison sites to scan the best deals, according to Joust.

Given the impact on borrowers’ hip pockets, Joust data revealed a “huge spike” in customers using its Instant Match service to refinance their mortgages, which mirrored the reaction the Commonwealth Bank has seen.

For example, Joust reported a 218 per cent increase in customers using its online comparison platform Instant Match in June, which followed the RBA’s May and June rate hikes.

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This followed similar results in July with a 217 per cent increase on the prior year.

Data from the Australian Bureau of Statistics (ABS) revealed, for the month of June 2022, owner-occupier housing loan commitments being refinanced rose 9.7 per cent over the month – marking a “new record high” of $12.7 billion.

While borrowers on variable loans will feel the impact of interest rate rises and look to switch, it has also slowed demand for new clients, particularly with a deposit less than 20 per cent, Joust data revealed.

Following years of record low-interest rates, Joust said borrowers have become increasingly “unwilling or unable” to take on loans with an LVR (loan-to-value ratio) above 80 per cent, given the risk factor and likelihood of lender’s mortgage insurance.

For example, its data showed in June 2021 more than one in four (27.85 per cent) of loans accessed through the online matching service had an LVR over 80 per cent – a deposit of less than 20 per cent.

However, in June 2022 the number of loans with an LVR over 80 per cent had plummeted to just 2.83 per cent, and there weren’t any over 91 per cent, indicating that the more “traditional ceiling” of LVR of 80 per cent was coming back.

Chief executive Carl Hammerschmidt said significant borrower and lender confidence last year contributed towards higher LVR lending.

“Despite the financial pressures of the pandemic last year, we were seeing sky high borrower confidence. Not only that, but lenders were very confident in the ability of borrowers to pay back home loans, even with LVRs over the 80 per cent threshold,” Mr Hammerschmidt said.

But as interest rates are expected to continue to rise, he expects a “return of the old trusted 80 per cent ceiling” for LVR in most home loans.

“Many households would have taken out loans in recent years by extending themselves further thanks to low rates, so it’s not a huge surprise that we’re seeing significantly less of these sorts of loans on offer from lenders,” Mr Hammerschmidt said.

Further, rising interest rates have also had a clear impact on the types of loans that borrowers are looking to, as fixed rate loans are becoming increasingly more expensive, and banks begin to pass on hikes, borrowers turn to variable rate loans and split loans.

For example, Joust’s Live Auction platform saw a 4.35 per cent increase in customer demand for variable rate loans in June 2022, when compared to the same month last year. Meanwhile, demand for split home loans also climbed from 7.67 per cent last year to 13.64 per cent this June – up 5.97 per cent.

With fixed rates tipping 6 per cent, in many instances, Mr Hammerschmidt said it wasn’t a surprise to see more people inquiring about variable rates.

“This trend will only continue throughout the remainder of the year and into 2023, further rate rises making both variable and split loans a significantly more palatable option for borrowers,” Mr Hammerschmidt said.

[Related: RBA announces 4th consecutive rate hike]

Borrowers hesitant for higher than 80% LVR
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