The announcement from Westpac that it is reducing its loan to value ratios on mortgages by ten percent could have a detrimental effect on affordability for thousands of potential home owners.
By increasing the level of deposit required on home loans from three percent to thirteen percent thousands of savers hoping to get a foot on the property ladder will now have to settle for a cheaper home.
Deposits are expressed as a percentage of the total value of a property and they are usually a small proportion of the property’s overall value. This means that any increase in the percentage of the deposit required leads to a larger percentage decrease in the total value of the property that the buyer can afford.
A buyer with a deposit of $20,000 could buy a property worth over $600,000 with a loan to value ratio on their mortgage of 97%. The same deposit amount would see the buyer able to buy a property worth around $150,000 at a loan to value ratio of 87%. The 10% decrease in the LTV ratio results in a much larger percentage decrease in the value of the property the buyer can afford.
While the increase in the deposit size for home loans has so far only been announced by one lender it could be indicative of a tightening of mortgage lending criteria across the wider market in the coming months.
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