What could the return of 95% lending mean for the property market

2010 August 23
by Tim Riley

Last week was an interesting one in the mortgage market for a couple of reasons.

Adelaide Bank announced the launch of a new 95% LVR full-doc mortgage product and the likes of Homeloans Ltd, Provident Capital and National Mortgage all moved very quickly in announcing their support for the distribution of the product.

Speaking to Michelle Coleman from WHO Finance about these changes, Michelle revealed that there are also rumors that Adelaide Bank is planning to release a new 70% LVR low-doc product in the near future.

So after nearly 2 years of tighter lending conditions where the vast majority of lenders reduced full-doc LVRs back to 90%, it seems that some non-bank lenders are now ready to try and claw back some market share from the major banks with the reintroduction of high LVR products.

Obviously Adelaide Bank has a business objective of gaining more market share off the major banks (given the major banks are not currently offering 95% loans) and its other competitors, however these developments indicate to me that there is an ever increasing amount of money becoming available to lend to residential property buyers.

Evidenced last week by the Bank of Queensland which announced the launch of the biggest Residential Backed Mortgage Security (RMBS) issue of the year, $1.6 billion. This was on the back of Adelaide Bank selling a $750 billion RMBS issue in early July. These are important developments because more money in the system tends to put upward pressure on price growth as borrowers are able to bid up prices because they can afford more.

Note however, that the new 95% LVR product is restricted to owner occupiers only. So there is still an element of credit rationing at play.

Another reason these moves are particularly worth taking notice of, is that it indicates that the lenders that have launched these high LVR products are confident that they will not see property price devaluations in the forseeable future. At least in the segments of the market that these loans are targeting.

The fact that these lenders are willing to offer a 95% mortgage could be seen to indicate that they are confident that the market is not going to drop by more than 5%. Being arguably the most risk averse party in any property transaction, I doubt any lender would want to put themselves in the position where they are lending money to a borrower that would see themselves in a negative equity position in the near term.

So despite the tight global credit conditions that are continuing to effect our domestic mortgage market, it is encouraging to see some lenders starting to move and fill this gap in the market. Clearly there is still demand for these types of products from borrowers. The major banks know this. It will be interesting to see if and how they and other non-bank lenders respond in the coming weeks and months…

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