Why buyers should think twice before taking out a low-deposit home loan

Australians have been warned to consider the ‘what ifs’ before taking on a low-deposit mortgage as buyers swallow more risk to beat the house price surge.

APRA figures released on Tuesday found the value of ‘risky’ new home loans 300 payday loan – those with a debt-to-income ratio greater than six – reached $21.55 billion in the three months to December.

That’s 26 per cent higher than in the December quarter of 2019, with those loans now comprising 17 per cent of all new home lending.

Additionally, the percentage of new mortgages taken out with a loan-to-value ratio (LVR) higher than 80 per cent climbed from 39.9 per cent to 42 per cent over that same timeframe – the highest jump in 13 years.

APRA’s figures coincide with a year dominated by low interest rates, first-home buyer incentives, and rising house prices flamed by a fear of missing out (FOMO) and a sense of there is no alternative – known as TINA.

RateCity director Sally Tindall said it’s highly likely the appetite for risk will shoot higher as low rates make home loans more affordable.

With Westpac forecasting a 20 per cent house price rise over the next two years, buyers will likely extend themselves further on large mortgages to afford their desired homes.

But Ms Tindall said this strategy is fraught with risk. Here’s why.

Beware of the hazards

Centaur Financial Services managing director Hugh Robertson told The New Daily many low-deposit holders approach housing with a short-term mindset.

As a result, they have neglected to factor in the effect of rising interest rates on their cash flow once rates normalise. Continue reading