"We hope the rate reduction will encourage owner-occupier customers with interest-only loans to switch to principal and interest," Mr Frazis. There will no switching fee.

Moody's has downgraded a dozen Australian banks, including the big four, claiming increasing risks because the nation's households have run up massive debt, often to pay inflated housing costs.

But other research, based upon a comparison of borrowers' deposit for mortgages in Australia with countries that have recently suffered a big fall in house prices, shows local lenders have built-in much bigger safeguards against a crash.

Westpac's BankSA and Bank of Melbourne are writing to mortgage brokers, who are an intermediary between borrowers and lenders, warning it is updating assessment of household income.

'Nowhere as bubble-like'

Household Expenditure Measure (HEM) is used to calculate a borrower's capacity to service a loan and includes the cost of food, clothing, motor vehicle running costs, rates, insurances, property, maintenance and repairs, telephone, gas, electricity, transport, fares, entertainment and basic education.

HEM is widely used by lenders for assessing home loan applications because it is based on more than 600 items in the government survey of household expenditure.

The banks said they will use the higher of HEM and the loan applicant's declared expenditure in assessing serviceability.


Other lenders, are also introducing more detailed analysis of applicants' total expenditure, capacity to repay and pushing up deposits.

For example, Macquarie Bank property borrowers have to disclose their spending on 12 separate categories covering household and discretionary spending to assess eligibility for a loan.

AMP Bank, the banking division of the nation's largest financial services conglomerate, has increased deposit sizes five-fold from 10 per cent to 50 per cent in under a month.

Moody's does not think a "sharp housing downturn" is a "core scenario" but the risk posed by rising household debt has to be considered when assessing the ratings of the nation's lenders, it claimed.

Campbell Dawson, a director of Elstree Investment Management, which has about $120 million under management in hybrid credit instruments, said a big difference between Australia and housing bubbles in other countries is that Australian domestic banks are demanding bigger deposits from borrowers.

According to analysis by the Australian Prudential Regulation Authority, the proportion of loans with loan-to-value ratios of more than 90 per cent is less than 8 per cent, which is the lowest since the regulator started recording details in 2008 and around one-third of peak levels in 2009.

Mr Dawson said: "In the United Kingdom, the proportion of loans with LVRs greater than 90 per cent in the mid-2000s was 30 per cent and in Ireland it peaked at just under 30 per cent. Due to the relatively low amount of high LVR loans, bank losses in case of default should be better than their overseas peers, particularly if house prices do not fall catastrophically."

He said Australia is "nowhere as bubble-like" as Ireland where property prices are still recouping losses nearly a decade after the crash.

"Interesting but not near-term calamitous," he said.