While we haven’t made a return to the pre-GFC days of 100 per cent loan-to-value ratios (LVRs) with home lending, they are increasing but the Reserve Bank believes we are well-placed to handle debt.
Overall LVRs are continuing to increase and banks are becoming more lenient with regard to lending practices, according to the RBA arrears aren’t a major problem.
In its latest Financial Stability Review report, the RBA noted that although the share of new loans with loan-to-valuation ratios of above 90 per cent has fallen “significantly” over the past few years, “it has edged up over the past year as competition in the mortgage market has intensified”.
While banks dropped their LVR ratios during the financial crisis, they are starting to creep up again. ANZ has LVRs at 90 per cent for new borrowers, and 95 per cent for existing borrowers, while customers at NAB, Commonwealth and Westpac are also able to access a 95 per cent rate.
However, the RBA also found that while loans made before 2009 are causing the recent uptick in arrears, the current state of mortgages is sustainable.
“Despite the increase over the first half of 2011, the overall mortgage arrears rate in Australia is still low by international standards, and the bulk of housing loans in arrears are well collateralised,” the report said.
“Moreover…there are a number of reasons why mortgage arrears are unlikely to rise as much as they have in some other countries. Not least is the more favourable macroeconomic environment in Australia.”
The report also noted the more conservative nature of Australian households following the latest global economic uncertainty.
“The household sector in Australia is continuing to exhibit a more cautious approach to its spending and borrowing behaviour than prior to the crisis,” it said.
“The household saving rate increased further over the past year and debt has continued to grow at a rate broadly in line with income growth. This relative caution may partly be motivated by recent volatility in households’ net asset position following a long period of rapid expansion.”
The report also noted that around half of mortgage borrowers are continuing to make substantial excess principal repayments, which is “improving their resilience to any change in financial conditions. “
How to calculate your LVR
The way to calculate loan to value ratio is divide the loan amount by the actual property purchase price or valuation (whichever is the lower).
For example: $80,000 loan ÷ $100,000 purchase price or valuation =0.8 x 100 = 80% LVR
Normally any loan with an LVR of 80% or more will attract Lender’s Mortgage Insurance (LMI)