MORTGAGE lenders are slashing loan ratios in a bid to protect themselves against falling house prices.
In the past fortnight, Commonwealth Bank, Bankwest, ING, Challenger, Citibank and Suncorp have all cut their maximum loans from 95 per cent to 90 per cent of the property value - and may cut further. ANZ cut its maximum loan to 90 per cent last November.
The move is designed to ensure the bank can recover the loan value, if the house has to be sold in the event of a loan default.
"There is a lot of talk about where house prices are headed and the possibility of price falls," Peter Hayward, of Citibank Mortgages, said.
"By reducing the maximum loan to 90 per cent, we are giving ourselves, and our borrowers, more of a buffer to ensure that if prices do fall, there is less risk of going into negative equity."
Challenger likened the move to when stockbrokers increased loan/valuation ratios on margin loans, when share prices fell.
"What you are seeing is a staged pullback by lenders from the market, to reduce risk," Challenger's Stuart Barton said. Related Coverage
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Westpac and NAB say their 95 per cent maximum loans are "under review" and may be adjusted soon.
Many experts fear that, by reducing the amount people can borrow, banks will trigger a fall in house prices because, if buyers cannot borrow as much as before, they will not be able to pay as much as previous buyers.
This kind of credit rationing led to the US housing crash, with lenders progressively cutting maximum loans, so buyers could no longer afford to purchase.
If the government cuts back the first home-buyer grant in June, this lowering of loan ratios by the banks may increase the chances of an abrupt fall in prices.
