Westpac-owned St George Bank has eradicated a major stumbling block for some first-home buyers as it battles other lenders to capture an expanding portion of the market.
However, some experts have suggested this could come at the expense of thousands of dollars more in repayments over the life of a loan.
St George announced on Monday it would reduce the cost of lenders mortgage insurance (LMI) for owner-occupier loans with principal and interest repayments to $1.
The changes cover loans with a loan-to-value ratio (LVR) of 85 per cent and lower, which means home owners with a $150,000 deposit could purchase a $1 million home under the scheme.
St George says home loan customers with a $850,000 mortgage could save about $21,465 on mortgage insurance.
Canstar group executive Steve Mickenbecker told The New Daily St George would likely want home buyers with “income capacity well in excess of their expenses” as the broader lending market dries up.
“The whole profitability of the banking sector is underpinned by home loans,” Mr Mickenbecker said.
“So if lenders can recruit first-home buyers who have proven they can save for a deposit and have solid employment, then they have anywhere from five to 10 years to recover that upfront (LMI) premium.”
Lenders generally charge mortgage insurance on home loans with an LVR that’s greater than 80 per cent to protect them in the event a borrower defaults on their mortgage.
But University of Technology Sydney professor of finance Harry Scheule told The New Daily St George’s bid to obtain a larger share of the buyers pool may prove costly – if it has miscalculated the risks.
With a record 37 per cent of Australia’s youth classified as “underutilised” – either unemployed or underemployed – Professor Scheule said young home buyers are one of the most at-risk groups for job insecurity.
“Generally speaking, promoting mortgage lending in the COVID climate where many existing loans are deferred and young professionals are amongst the ones most exposed to income and job losses may not be prudent or in the best interest of bank and consumer,” Professor Scheule said.
How can St George bank on first-home buyers?
Currently, St George holds a 3.34 per cent share of the mortgage market, according to mortgage broking group AFG, up from 1.93 per cent in May – part of a widespread shift towards major lenders through the pandemic.
A Westpac spokesperson confirmed to The New Daily the offer would be extended to other Westpac subsidiaries Bank of Melbourne and Bank of SA customers by the end of July.
The scheme works similarly to the federal government’s First Home Loan Deposit Scheme, which lessens the deposit burden as it guarantees 15 per cent of a first-home buyer’s loan.
However, St George’s LMI changes follow figures from the Australian Bureau of Statistics last week that revealed new loan commitments plunged 11.6 per cent in May, the highest monthly fall on record.
Those falls were largely driven by a 16 per cent slide in investor mortgages, which is expected to hurt the banks’ bottom line.
Professor Scheule said St George may have afforded reducing upfront costs by increasing costs elsewhere.
“St George provides LMI itself [so] the firm may be able to provide it at almost zero costs and may cross-subsidise through other ways, including on mortgage rates,” Professor Scheule said.
However, Westpac said first-home buyers would not wear the costs of the offer.
“The normal interest rates and lending criteria currently still apply – the lowest being 2.69 per cent on our basic home loan – but the difference is an 85 per cent LVR,” a Westpac spokesperson said.
“The customer will not be making up upfront costs in their repayments, but LMI will still be reflected in a customer’s home loan offer documents.”
More ‘innovation’ expected as banks jostle for FHBs
With the race to the bottom on home loan interest rates nearing its end, Mr Mickenbecker said he would not be shocked if more big four and second-tier lenders began experimenting with new enticements.
With the total value of new investor loans declining 15.6 per cent over May, he said first-home buyers present their biggest opportunity to bolster their mortgage portfolios.
“Savings in the tens of thousands of dollars is too big a cost for some of the smaller lenders, but those with enough mass and muscle to absorb those upfront costs could possibly do so,” Mr Mickenbecker said.
“So expect some kinds of incentives – whether it’s specials on loans or absorbing other upfront costs – to attract more first-home buyers this year.”