Lenders pricing for risk with rate discounts

Lenders are rewarding borrowers with lower Loan to Value Ratios (LVRs) by offering reduced interest rates.

According to Canstar, one in two lenders is pricing in the risk of falling property prices by offering lower-rate loans to borrowers with large deposits or high equity.

Canstar’s finance expert, Steve Mickenbecker said lenders aren’t prepared to lose their equity buffer in the event of sharp falls in property values.

“Property prices are widely expected to fall by 10 per cent to 20 per cent, which would see 80 per cent loan to value ratio loans too close for comfort to zero equity,” Mr Mickenbecker said.

“Lenders are looking for loans where there is a greater buffer for falls in property prices and almost half of them are rewarding these borrowers with lower interest rate offers.”

For borrowers with a 40 per cent deposit or the equivalent equity in their property, Canstar’s research shows 49 per cent of lenders on its comparison site are offering interest rates that are on average 0.21 per cent below the rate being paid by borrowers with a deposit half that size. 

Almost one third (29 per cent) of lenders are also offering discounts to borrowers with a 30 per cent deposit or similar equity in the property, however, the average discount is much lower at 0.13 per cent.

Mr Mickenbecker said with the sharp home price appreciation we’ve seen in recent years, many borrowers are likely to be sitting on healthy equity positions.

“There may be a strong case for borrowers in this position to open up a negotiation with their lenders for a rate reduction,” he said.

“Even after allowing for the high equity discounts, there are still likely to be better rates available for borrowers who cast their net wider than their current lender. 

“With the lowest rate available still 0.69 per cent below the average for lenders who offer a discount for 60 per cent loan to value ratio loans, the rewards are compelling enough to consider making the switch.”

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.