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.
Borrow 95% of the purchase price
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:
- A clean credit history – on-time repayments on existing debts over at least the last six months;
- A strong asset position – the lender will determine the strength of your assets based on your age and income;
- Stable employment – you will typically need at least six months in your current job, although some exceptions may apply;
- Low personal debt – this figure should not amount to more than five per cent of the value of your property;
- Some genuine savings – this should amount to at least five per cent of the property’s value to make up the shortfall of the loan, and cover the expenses associated with buying a property.
Some lenders will also take the property type and location into account when considering your application. Supply and demand means that there will be more volatility in some housing markets (such as inner-city units) than others.
Are there borrowing limits for a 95% home loan?
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.
What is LMI?
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.
How much LMI will I pay?
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.
Which lenders approve 95% mortgages?
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.
What other options could I consider?
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:
- Tax refunds;
- Money raised through the sale of shares or assets;
- First Home Owner’s Grant;
- Monetary gifts.
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.
A guarantor loan
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.
What to do next?
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:
- Use our calculator to work out how much you need to borrow.
- Live chat with a uno home loan adviser to discuss your situation.
With Alexi Neocleous
The information in this article is general in nature. Please seek advice from a licensed professional when making financial decisions.