Leading consumer advocates are divided on whether tighter lending rules are needed to quell the country’s overheating housing market.

The Sydney-based Financial Rights Legal Service is warning that a push by bank regulators to tighten lending rules on home loans could have unintended consequences for Australian households, including retirees.

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The Reserve Bank and the Australian Prudential Regulation Authority are expected to furnish details of special measures they may use to dampen domestic borrowing activity at a Senate hearing on Thursday.

At the top of the regulators’ list is a proposal to force first home buyers to stump up more cash before they are able to qualify for loans offered by banks and other lenders.

At the moment, many first home buyers can borrow up to 95 per cent of the value of a property purchase, but that might be reduced to as low as 80 per cent if the regulators tighten lending rules.

New rules could make buying a home harder for some. Photo: AAP

Such a change would compel first home buyers to contribute a minimum cash deposit of $70,000 on an average property valued at $350,000.

Some lenders are currently accepting deposits of less than $20,000 on such property transactions.

Alexandra Kelly, the principal solicitor at the Sydney-based Financial Rights Legal Service, says tightening loan-to-value ratios would discriminate against young couples on low incomes.

“There will be consumers who will be disappointed because this will act as restraint on their ability to find a loan and buy a house – people under 30 will be hurt the most,” she said.

“But this is a tricky issue because it may also protect some vulnerable consumers from taking on loans that they cannot afford to service.”

Ms Kelly warned that an unintended effect of tougher lending rules would be to increase pressure on self-funded retirees to subsidise or guarantee the borrowings of their adult children.

“The pressure on the elderly to support their children to enter the home market is increasing,” she said.

“In some cases, retired parents have agreed to be co-borrowers.”

A recent study of the domestic mortgage market by consumer advocate, Choice, found that one-third of all new home loans required borrowers to stump up a deposit of less than 20 per cent of the property value.

Choice is supporting the introduction of tighter loan ratios if they are likely to improve responsible lending by banks.

“We understand why some consumers might be tempted by high loan to value ratio products but we also know that the banks won’t be there to hold their hands when interest rates start rising,” said Choice spokesman Tom Godfrey.

“We support responsible lending, and if macro-prudential changes are required to ensure lending is responsible, that is worth considering.”

Preliminary research by bank academics at Massey University indicate that the financial pressure on Kiwi retirees may have intensified since tighter loan-to-value ratios for first home buyers were introduced in New Zealand in 2013.

Maximum loan-to-value ratios were introduced in many Asian countries following the economic crisis that swept the region in the late 1990s.

The Reserve Bank last week reiterated its concerns about heightened demand in the Melbourne and Sydney property markets.

“The composition of housing and mortgage markets is becoming unbalanced,” the central bank stated in its latest Financial Stability Review.

“Some institutions appear to be lending at high loan-to-income ratios and, overall, the average size of new loans has risen recently.”

In August, the RBA warned the government’s Financial System Inquiry to reconsider policy recommendations that would stoke demand in the housing market.