Research has found potential borrowers are saving rather than taking on debt this year, and Australian banks have responded by loosening their lending criteria.

According to Australia's financial comparison site, RateCity, with recent data showing that there were more than 40,000 fewer first home buyers in the last 12 months compared to the average of the last 4 years, lenders are trying to kick-start the sluggish mortgage market in many ways.

Aside from negotiating on rates and fees, and slashing fixed rates, banks are now willing to lend to people with less deposit or equity, by increasing the loan to value ratio.

“This means many more potential borrowers are eligible for loans than might have been the case just 12 months ago,” said RateCity CEO Damian Smith.

LVR is the maximum mortgage offered as a percentage of the property value. For example, if the value of a home is $400,000 and the maximum LVR is 95 percent, a borrower would be eligible to borrow up to $380,000, implying a deposit of $20,000 (or 5 percent).

Smith said: "Almost 70 percent of home loans in our database now offer up to 95 percent of a home's purchase price, which is the highest loan-to-value ratio levels we've see in more than two years, up from 49 percent 12 months ago."

"All major four banks now offer home loans with up to 90 percent LVR while Commonwealth, Nab and Westpac also offer up to 95 percent LVR on some of their home loans.”

Smith said that while the higher LVR loans offered a way into the market for some customers, there were risks for borrowers.

“There’s an obvious temptation to jump into the market if an institution will lend you 95 percent of the property’s value. Remember, though, that you’ll almost certainly have to pay Lenders Mortgage Insurance because your deposit is small, and most importantly, remember you now have a much larger debt.

“Any increase in interest rates, or a reduction in your income, has a much bigger impact because you have a larger mortgage,” he said.