The decision will make it far harder for first-home buyers to obtain a loan despite the doubling of the first-home buyers' grant to $14,000 and $21,000 for new homes.

It is also bad news for property values with the likelihood that real estate prices will fall further as fewer borrowers will be able to meet the tighter credit requirements of the banks.

Bank sources have revealed that some banks have wanted to officially tighten criteria further on borrowers, but have been dissuaded after talks with the Federal Government.

The change in the loan-to-valuation ratio will also hurt housing construction which is reliant on borrowers being able to finance a high proportion of new home valuations.

The decision by the large banks to tighten lending criteria represents a higher emphasis on the ''quality rather than quantity'' of loans, according to Canstar Cannex home mortgage analyst, Frank Lopez.

In the past, banks have been prepared to lend up to 100pc of valuation for owner-occupiers provided it was accompanied by mortgage insurance.

But the ANZ recently decided to reduce its maximum loan with insurance to 90pc.

The Commonwealth is offering up to 95pc with insurance. Westpac has this month reduced its loan-to-valuation ratio to 97pc.

The NAB ratio is still officially 100pc.

NAB, while not officially changing its policy, has confirmed that it is applying stricter criteria for home loans above 80pc of valuation.

Mr Lopez said the banks have also moved to require insurance on most loans above 60pc of valuation, whereas previously it was not generally required until loans exceeded 80pc of valuation.

Many of the smaller banks have also moved to tighten their home credit requirements, although some are still claiming to lend up to 100pc of valuation.

Mr Lopez said the banks are protecting their interests but also those of borrowers who could find they owe more on their loans than their properties are worth if the property market continues to fall.