You may have noticed anecdotally, or by following our weekly rate wraps, that there seems to be barely any interest rate incentive to build a larger deposit (or refinance with more equity).
You wouldn't be wrong.
RBA data on new loans funded in the month shows the margin has narrowed between rates demanding LVRs of a maximum 80%, and those with LVRs above 80%.
For owner occupiers, the gulf at the end of April 2022 was 35 basis points; at the end of November 2023 it was just 21 basis points.
A recent joint report from ANZ and CoreLogic found saving for a 20% deposit for an average home loan size now takes nearly 10 years, pushing out the average age of a first home buyer to 36.
A decade ago, the median house price in Sydney was $670,000; ABS unstratified data shows it's now $1.32 million as of September 2023.
With less of an interest rate discrepancy, some homebuyers might look to speed up their savings horizon and enter the market with a smaller deposit - as long as it's 20% to avoid paying lenders mortgage insurance (LMI).
Although the differences are narrowing amid tighter monetary policy, the LVR rate discrepancies were generally much narrower prior to the Covid lending boom.
For investors the narrowing is less pronounced; it was 32 basis points at the end of April 2022, and in November 2023 it was 31 basis points - it peaked at 40 basis points in April 2023:
Firstmac chief financial officer James Austin (pictured below) explained why there's lack of incentive to enter the market with a bigger deposit.
“This dynamic was due to the intense rate war that happened in prime markets primarily driven by the banks,” Mr Austin told InfoChoice.
“In a bid to maintain market share, many lenders - having lost out to ANZ in particular - reduced their >80% LVR loan pricing.
“This pricing dynamic didn’t apply as much to investor loans as the regulator has a higher capital weighting on those.
“The war appears to be over now, ending in June/July. Margins will have stabilised since then.”
Capital weighting refers to banks having to have higher coverage and funding for investment home loans, and are reflective of the customer's likelihood of default.
A bank funding an investment home loan at 80% LVR is expected to have a 45% risk weighting, 10 percentage points higher than owner occupier home loans.
With higher capital requirements due to increased risk, there is less incentive for banks to offer competitive interest rates.
Rebecca Jarrett-Dalton, founder of mortgage brokers Two Red Shoes, explained what messages brokers are getting from lenders.
“Interestingly some of these [LVR] tiers are moving around. For example on Friday one lender put up the interest rate on the lower tiers but moved it down on some of the higher LVR tiers which compresses the difference,” Ms Jarrett-Dalton told InfoChoice.
“Additionally, we used to be able to push a little harder for discounts with the majors but that isn't making as much difference anymore. The difference is only around 0.5% - but hey we will take any discount at all.”
In the interests of full disclosure, InfoChoice is part of the Firstmac Group
Head image by jcomp on Freepik
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