31 Mar Bigger loans, smaller deposits – Sally Tindall
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 was taken by comparison website RateCity and Sally Tindall, Money Editor for Rate City joins me to discuss the findings.
Kevin: A study of more than 3000 potential mortgage customers has found an alarming number of people are opting for bigger loans with smaller deposits. The study was taken by comparison website RateCity, and Sally Tindall, who is the Money Editor for RateCity joins me.
Sally, this is somewhat of a disturbing report.
Sally: It is disturbing. We’ve found that our customers using our site are really looking for the smallest deposit possible and they’re looking to take out really large loans. We’ve actually seen an increase over the last five years of 23% in loan size, but they’re increasingly asking for smaller and smaller deposits, and that could be a reflection of the fact that interest rates are so low, so people feel that they’re able to stretch themselves a little bit more and buy a bigger house, basically.
Kevin: Yes, somewhat scary. What do you think of the long-term impacts of this situation?
Sally: It’s an incredibly risky strategy, and it’s also a much more expensive way to borrow, because small deposits actually attract higher interest rates from the banks because it’s risky for the banks to be lending to people with a small amount of equity in their loan, so the customers are really at loggerheads with the banks and they are going to be paying for it in terms of higher rates.
Kevin: Are the banks – do you think – getting a little bit too soft? Are they offering too many sweeteners?
Sally: Well, look, some banks are actually really cracking down on loan-to-value ratios and they’re offering the rock bottom prices of under 4% to borrowers who have hefty deposits of anywhere up to 60%, if you can believe that. But there are some lenders out there that are happy to take on new borrowing at 5% deposit, and that’s where the risks really occur.
We don’t want to see another iteration of the US subprime mortgage market collapsing, so the government regulator is really looking at these people who have got small deposits and so are the banks.
Kevin: This might be a hard one for you to answer, Sally, but I’d really like your opinion on this. We are hearing reports that as a nation, we’re becoming better savers. Do you think it’s just that people have the savings but they’re not prepared to put it into a deposit that they’re opting, as you say, to head toward the lower-interest type loans?
Sally: Look, I think every person has a different reason for wanting a small deposit. It might be that they’re trying to rush into the market before it escapes. It could be that they have some sort of family circumstances where they can only get a small deposit. So everyone is different.
We are actually a nation that’s very good at putting money into things like offset accounts, so we’re quite savvy when it comes to that, but I do think it’s a matter of people wanting to buy larger properties with bigger price tags attached, particularly in markets that are increasing in growth.
Kevin: Do the banks penalize borrowers with little or no deposit – in other words, with higher interest rates?
Sally: Absolutely, and they penalize them quite significantly. Look, we’ve done a bit of research into this, as well, and we’ve found that some of the lowest rates on our books – at 3.89% – are only available to people with a deposit of at least 20% but in some cases, up to 60%. What these banks are telling us is that they’ll give you a good rate but only if you’re a refinancer who’s an owner-occupier and has really stable source of income.
Kevin: Well obviously, it’s good business for the bank to get people on higher interest rates, but do you think at some point they’re going to cut off their book for the low-deposit type borrowers?
Sally: They certainly might. If the global market continues to be in turmoil and the government regulator here in Australia continues to crack down on risky lending – which is ultimately what we’re talking about – then absolutely; we could see the banks starting to say, “No, sorry. You’re going to have to stump up with more than that.”
Kevin: Is the banks’ tightening of lending criteria for investors, is that showing any signs of having some impact?
Sally: It really is. We’re seeing the biggest impact happen in the investor lending market. Back in July of last year, most of the banks introduced differential pricing for investors and owner-occupiers, and immediately we saw that investor lending has dropped dramatically. I think between June of 2015 and December of 2015, there was a massive $2.4 billion drop in investor lending, and so that market signal is working.
Kevin: Sally Tindall, Money Editor for RateCity. Thank you for your time, Sally.