Mortgage lenders cut loan ratios

Most of the banks are slashing their loan ratios in a bid to protect themselves from falling house prices.

Over the past two weeks Commonwealth Bank, BankWest, ING, Citibank and Suncorp have all cut their maximum loans from 95 per cent to 90 per cent of the property value and may cut them even further. The ANZ cut their maximum loan to 90 per cent last November.

This move has been designed to ensure that the bank can recover the loan value, in case the house has to be sold in the event of a loan default.

Peter Hayward, of Citibank Mortgages has said that there is a lot of talk about where house prices are headed and the possibility of prices dropping. He went on further to say that by the banks reducing the maximum loan to 90 per cent, they were giving themselves and their borrowers, more of a safety net to ensure that if prices were to fall, then there would be less risk of going into negative equity.

Challenger compared the move to when stockbrokers increased loan/valuation ratios on margin loans, when share prices fell. Challengers Stuart Barton stated that what we were seeing was a plan by lenders to reduce risk.

NAB and Westpac have stated that their 95 per cent maximum loans were under review and may be adjusted in due course.

Experts fear that by the banks reducing the amount that people can borrow will provoke a fall in house prices, due to buyers being unable to borrow as much as before, they will be unable to pay as much as previous buyers. This kind of credit rationing led to the housing crash in the US with the banks continuously cutting maximum loans, so buyers could no longer afford to buy.

If the Government should decide to discontinue with the first home buyers grant in June, and by lowering of loan ratios by the banks, could possibly increase the chance of rapid falls in house prices.

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Published on April 4-th, 2009 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.
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