More lenders are currently prepared to finance 95% or more of the value of a home but is it really a good idea to borrow that much of a property’s value?
At the moment major and non-major lenders are prepared to finance as much as 97% of a property’s value. Such high loan-to-value ratios (LVRs) have not been available since before the onset of the GFC.
The criteria will differ between lenders but how do these loans work and how do you decide whether it is ever a good idea to borrow such a high percentage of a home’s value?
How widespread are these loans?
Rochelle Hall from Aussie Home Loans in Brisbane says they’re not available across the board. The vast majority of lenders are limiting home loans to 90% of the property’s value plus Lenders’ Mortgage Insurance.
“Some lenders are prepared to go to 95% plus mortgage insurance which can take a client to in excess of 97% and a couple of lenders don’t want to see 5% genuine savings,” says Hall.
In other words, it’s currently possible to qualify for a high-LVR loan with your 5% of the purchase price coming from a source other than genuine savings, including the First Home Owners Grant (FHOG) or a gift. Hall says the only thing that won’t be allowed is using a loan to cover your 5%.
Who will qualify?
According to Hall, lenders who are happy to finance up to 97% will look closely at your employment status and history.
“We’re not talking about people who’ve gone through six jobs in two years,” she says.
There are also postcode restrictions. Lenders will consider going as high as 97% for properties in metropolitan areas with good potential for a quick resale. This is to ensure that if the loan goes bad they can offload the property in a reasonably short period of time.
Although not usually publicised, applicants approaching retirement age may have difficulty finding a lender willing to go to a 95% or higher LVR.
And Hall says even though some lenders are happy to provide home finance to people without genuine savings, “most lenders willing to have an LVR as high as 97% do want to see 5% genuine savings,” she says.
How much will it cost?
Hall says the other good news is that even those lenders who do not require genuine savings are not penalising borrowers by charging a higher interest rate.
She says recent deals include securing a loan with a 97% LVR and no genuine savings for between 5.99% and 6% fixed for three years. If you want a variable loan the most competitive recent rates have been around 6.3%.
The catch is that you’ll be required to pay for Lenders’ Mortgage Insurance (LMI) as part of the deal. On a $300,000 loan over 30 years with a 95% LVR, the LMI (depending on which insurer your lender uses) will cost 2.1% of the loan amount, paid at the start of the loan and put on top of the loan.
That turns your $300,000 loan into a $306,000 loan. The additional interest you pay over the life of the loan may end up costing you an extra $12,000 instead of $6,000.
“But if you hold off buying until you save the extra 5% how long will it be before property values go up by more than $6,000? Not that long,” says Hall.
Any other traps?
Hall says it is mostly first home buyers who are taking up these 95-97% home loan offers and they “need to know how to negotiate a good price on the homes they’re interested in”.
By being a tough negotiator when dealing with real estate agents it is possible to reduce the asking price of a property by more than 5% and this is the best way to reduce your loan size and the overall cost of your mortgage insurance.
It’s also worth avoiding these loans if you don’t have strong savings habits, cautions Hall.
“I wouldn’t advise such an arrangement to clients who were still living at home with their parents, with no savings and using a gift as their deposit,” she says.
-- By Jackie Pearson
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