First home buyers may be finding it tougher as lenders try to attract lower-risk borrowing, writes Clancy Yeates.

Banks all claim to be making life easier for their customers, but the fact is they offer much better deals to some people than others.

This is becoming increasingly clear when it comes to the biggest financial commitment many people make: taking out a home loan.

As regulators pressure banks to rein in the risks in the housing market, lenders are competing harder for certain customers in particular: those who live in the property, have high incomes, and have a deposit for a home of more than 20 per cent of the purchase price.

This emphasis on lower-risk borrowers could make it harder for first home buyers to secure the sharpest interest rates, as they tend to have smaller deposits, and often, lower incomes due to their age.

What is more, it is coming at a time when the market has already been flooded by buyers with hefty deposits, as shown in this week’s graphic.

Sky-rocketing house prices around the world have made regulators much more edgy about dangers in the mortgage market, so they are leaning on banks to limit their risk-taking.

One effect of this is it is causing banks to chase customers with larger deposits.

For instance, reports that the lowest advertised home loan interest rates of less than 4 per cent are only available with loans that are worth 80 per cent of the purchase price or less.

The reason banks like customers with big deposits is pretty simple: a large deposit means it would take a bigger fall in house prices before the bank risks losing its own money.

It is known as “risk-based pricing” – the idea that customers who pose less risk to the bank pay a lower rate, rather than everyone paying a similar cost of credit.

Experts reckon it’s a trend consumers will see a lot more of.

A report from JP Morgan earlier this year argued the next wave of bank regulations would put even more emphasis on deposit size, encouraging banks to offer sharper deals on loans with lower loan-to-valuation ratio of 60 to 80 per cent.

It means people with bigger deposits may increasingly become the banks’ most sought-after customers, while putting others – such as first home buyers – at a relative disadvantage, as lenders such as ANZ Bank have pointed out.

Borrowers with smaller deposits are still being offered plenty of credit: says more than three quarters of the loans on its database are offered with an LVR of up to 90 per cent, and about half are prepared to lend you up to 95 per cent of a property’s value.

It’s just that these loans will often come with a higher interest rate, and often, the added cost of mortgage insurance.

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Posted by Clancy Yeates – The Age on 7th December, 2015