These days, it’s recommended home buyers save as much as 20% of the home’s value, to put towards a deposit. But raising a 20% home loan deposit makes it challenging for first-time buyers to enter the housing market – particularly given the high prices in our capital cities. The good news though, is that under some circumstances you may be able to secure a mortgage with as little as a five per cent deposit.
With some lenders you may be able to borrow up to 95% of the value of a property if you meet eligibility criteria. Generally you will have to look as ‘safe’ on paper as possible to offset the increased risk that your high loan-to-value ratio (LVR) presents. Typically this means you need:
Some lenders may allow you to borrow up to $1 million if your application is strong enough. However the majority of lenders don’t offer 95% home loans on amounts over $800,000. While borrowing large sums can enable you to buy sooner, it’s worth remembering that the more money you put into your property upfront, the less you’ll pay in interest over the course of your loan. Furthermore, if you borrow more than 80% of the value of your property, you will also need to add Lender’s Mortgage Insurance (LMI) to your loan.
LMI is a mortgage insurance premium that protects the lender’s funds should the borrower default on their repayments, and the property be sold for less than the outstanding debt on it. It is a one-time fee that is paid at settlement, but that can usually be included in the loan.
LMI on a 95% home loan varies between 1.5% and 5.1%. How much you have to pay will depend on the size of the loan. Capitalising your LMI places it on top of the loan, which means you pay interest on the fee over time. This also raises your LVR, though most lenders don’t allow this combined amount to go beyond 97% of your home’s value.
An UNO adviser can help you find a lender with the home loan product you want. Typically this would be through a non-bank lender. Major lenders are wary of loans with high LVRs because of the extra risk that they pose. Specialist lenders are more willing to take on the risk, although they counterbalance this with higher interest rates on their loans. Most standard home loan features are available with 95% loans.
Instead of taking on more debt and paying increased fees and charges for it, consider whether there are other ways that you could raise money for a deposit. Some lenders will accept ‘genuine savings’ for a home deposit from other sources than a personal savings account. These can include:
Many first-time homebuyers put money gifted to them from their parents into their home deposit. As long as funds are gifted and do not need to be repaid, most lenders accept financial contributions from close family.
Similarly, sometimes parents serve as guarantors for a loan. In this case they do not need to pay money upfront, but they put up assets – such as property or savings – as security against a percentage of your home loan. In this case you do not need a deposit at all and will not be required to pay LMI. A guarantor loan will also give you an increased choice of lenders. This could mean a more competitive product in terms of the interest rates, fees and charges you will pay on your mortgage.
With the right lender it’s possible to borrow up to 95% of the value of your home. However you’ll have to carefully consider whether this is the best strategy for you, and you’ll also need a strong application to be approved. Before starting your home loan application, we recommend you do the following:
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