Such borrowers are more vulnerable to an economic or financial shock such as a recession or an increase in interest rates. A high LVR loan is more likely to be underwater in the event of a default and is therefore a riskier proposition for the lender.
A restriction on the volume of high LVR loans should reduce the inherent risk in banks’ mortgage portfolios as well as reducing the overall supply of credit to the housing market. The international evidence suggests that a prevalence of high LVR lending can accentuate loan losses and worsen economic disruption when inflated house prices correct abruptly. Two examples are the United States and Ireland.