Lending criteria still tough - but borrowers can negotiate

23rd May 2010

Lenders show no signs of easing lending criteria, according to a study of home loans by financial comparison website RateCity. But borrowers who shop around can find lenders with competitive criteria and interest rates – and willing to negotiate.

The research found a continuing decline in the number of home loans with a high loan-to-value-ratio (LVR) of 95% or above. The study of 2,127 loans found 1,079 loans with a 95%-plus LVR in May, compared to 1,110 such loans available in February.

The picture was even starker for very high LVR loans of 98% - RateCity recorded only one such loan in May, compared to 20 mortgages with a 98% LVR in February.

RateCity’s CEO Damian Smith says this continues a trend which started in late 2009 with rising interest rates.

Conversely, loans with LVRs of 80% (requiring higher deposits) increase markedly compared to September 2009.

Loan-to-value-ratio (LVR) refers to the amount of money borrowed for a property compared to what the property is worth. If a property is valued at $300,000 and you borrow $270,000 for example, the LVR is 90%. Adjustments to maximum LVRs are one of the main devices used by financial institutions to increase or decrease the amount they lend, alongside interest rates and fees.

Smith says tighter lending criteria are making it tougher for first-home buyers. However, many lenders are willing to negotiate with individual borrowers around LVRs, as well as fees and rates.

“While lenders are being more cautious overall, this doesn’t mean they will not negotiate a better deal if you ask and have the facts to back up your argument,” says Smith.

“We’re seeing more and more lenders willing to negotiate with individual customers that are armed with information on the mortgage market.”

Smith’s tips on applying for a home loan:

1. Compare home loans to find a deal with the interest rate, fees and features that suit your needs.
2. Look closely at smaller lenders because not only are their interest rates very competitive compared to bigger lenders but their LVRs are usually better. Seven lenders offer a 97% LVR, for example, including Bendigo Bank, CUA and Service One Member’s Bank.
3. The lower the LVR you want for a home loan, the less risk you are for lenders and therefore you may be able to use this to negotiate a better deal.
4. You should try to have 20% of the purchase price so you have enough for a deposit and fees such as stamp duty and legal fees.
5. Create a budget to work out your mortgage repayments and expenses so you can calculate how much you can afford to borrow. Make sure you stay under 30% of your income for mortgage repayments and allow for a 2% buffer in case rates rise.