Are home buyers really more responsible?

It’s a difficult time for home buyers and in particular for first home buyers because of the booming Australian property market. Many articles have been written lately about how home buyers face the financial challenges of getting a home loan.

Home Loan Challenges

In an article from Karina Barrymore from the Herald Sun: Debt Decline as Home Loan Borrowers Show Caution, she writes that despite an increase in low-deposit mortgages offered by banks, borrowers are being more cautious with a decrease in the number of these higher-risk loans.

She cites research from research company finder.com.au. They conclude that today only 9.8% of people applying for a home loan have less than a 10% deposit compared to 15 per cent of borrowers a year ago. According to finder.com.au this is the lowest level of these higher-risk loans since 2010.

Finder.com.au spokeswoman Michelle Hutchison is quoted as saying:

Borrowers are being more responsible with their home loans and taking on a lower debt in ­proportion to their deposit.

She also comments:

First-home buyers are clearly taking longer to enter the market and when they do, they are more prepared, with bigger deposits.

I’ve seen before that data with regards to first home buyers are not correctly interpreted. I believe this is also the case here.

As property values rise, the amount for a deposit also rises and this is what I believe is driving the decline.

A higher deposit is leading to a greater number of potential home owners giving up or being scared off by the size of the mortgage they are going to have.

So it’s not a matter of being ‘more prepared’. It’s simply because first home buyers can not afford to buy.

Another factor is the LMI (Lenders Mortgage insurance). As the loan size increases so does the premium for this insurance. This insurance btw covers the lender and not the borrower.

On a loan of $400K at 95% LVR (loan to value ratio), the LMI premium will be around $15,000. And at 90% LVR a first home buyer has to pay approximately $8,000. As the LVR increases due to property values the premium from 90% to 95% nearly doubles.

Having to find this additional amount to purchase the property including all the other costs explains in my view why so many people are being put off to purchase their first home.

What are your thoughts? What is driving the decline in higher risk loans? Are people more responsible or is it that they simply can not afford the additional costs?