95% Home Loans: Want to get Into The Property Market with less deposit?

Alex Sperling
Small Deposit

i 3 Table Of Content

Mar 8, 2023

Small Deposit? Consider Lenders That Offer 95% LVR Home Loans?

Have you been considering taking the plunge and getting into the housing market as a first home buyer but don’t have much of a deposit? You could be in for some good news, and here’s the reason why…

A 95% loan-to-value ratio (LVR) home loan is the perfect option for home buyers or those who are making their first foray into the real estate market and have a limited amount of funds. Several lenders offer this type of loan.

Generally, first time home buyers need to have at least twenty percent of the cost of the home in order to qualify for a loan. This can lead to a great deal of stress and strain on both the financial situation and one’s emotional well-being.

In addition, by the time you have saved a 20% deposit, the value of property prices is likely to have risen, making your goal of owning a home more difficult to achieve. .

With 95% LVR Loans, it’s Possible To Get Into The Property Market with Just a Small Deposit.

So if you’re ready to take that step, speak with a mortgage professional who will be able to research among their panel of lenders and find out which lenders offer loans with an LVR of 95%.

They will be able to make sure you have enough money saved up to cover additional costs like stamp duty, solicitor costs etc., this is referred to as a funding position.

It’s called making sure you have the funds to complete the purchase.

They will also make sure you have enough income to manage ongoing mortgage repayments.

They would also be able to compare home loans and provide a short list of possible lender options that you may qualify with.

How Is a 95% LVR Mortgage Different To Other Home Loans?

As you have less than 20% deposit, a 95% LVR home loan is different as it means you are borrowing more of the property purchase price, leaving you with less equity in the home.

The web is full of information regarding home loans, which state that you only need a 5% deposit for a 95% loan; however, this may not be the case, and it would depend on the individual’s personal circumstances.

Imagine that you are looking to purchase a property for $500,000, then you would need to pay a 5% deposit which would be $25,000.

Many websites have stated that if you can come up with a deposit of $25,000, the lender may be willing to loan you the remaining amount providing you meet their lending criteria.

If you were borrowing $475,000, this would provide you with a loan-to-value ratio of 95%.

While in theory, the first home loan deposit scheme FHLDS would be beneficial for you and your financial situation, you would need to pay for lenders mortgage insurance if you cannot take part in the scheme.

Most lenders will limit the loan to value ratio of 95% to include the cost of lenders mortgage insurance.

When purchasing a property at a cost of $500,000, approximately an 8% deposit of around $40,000 will be required. This is due to the addition of the Lenders Mortgage Insurance, which will be added to the loan, creating a Loan to Value Ratio (LVR) of 95%.

This figure is inclusive of the amount of money that you would have paid for mortgage insurance.

By looking at the information provided above, you can see that you would own a 5% equity stake in the property, but you must be able to come up with the 8% deposit or its approximate value. (It would be true in this example, it most likely would differ depending on your individual situation)

It is possible to find a few lenders who will allow you to capitalize lenders mortgage insurance above 95% LVR.

However, this is not the norm, and the lending market is always changing, so it is recommended to get advice from an expert.

Who Can Apply For 95% LVR Home Loans?

Australian citizens or permanent residence holders may be eligible to apply for a 95% home loan as long as they can provide evidence that they are able to repay the debt without suffering from any form of financial hardship.

It is essential that you are able to demonstrate that you have a regular and consistent income, meaning you are employed and have a reliable employment history.

In order to be approved for a loan, you will need to have saved up a genuine amount of money in a span of at least three to six months, or some lenders will accept a rental history of six months or more as a proof of genuine savings, although it is still important to have a deposit of at least 5% to 10% since having a rental history alone is not sufficient.

The amount of deposit varies depending on several factors, such as stamp duty, government grants that you may be eligible, such as the first home owners grant if you are building a new home.

90% No LMI Home Loans For Medical Professionals and Other Industries

If you are a Medical Professional or in other professional industries, some lenders may offer to waive the LIM cost if you have a deposit of at least 10%.

Not all lenders offer LMI waiver, so it’s best to speak to a professional mortgage broker to get the latest information.

A Smaller Deposit May Mean Paying More in Interest

Since you are unable to provide the traditional 20% deposit, the loan amount is naturally increased which causes a higher amount of interest to be paid due to the lower deposit and therefore there will be a higher amount of interest payments over the term of the loan.

Certain lenders have a tiered pricing structure, which can lead to higher interest rates on loans with higher loan to value ratios due to the higher risk associated with these types of loans.

Although this isn’t always the situation, some lenders will provide the same rate no matter the LVR, it is not a definite answer as each lender has their own products and criteria and the outcome depends heavily on which lender you qualify with.

This then determines what kind of product you may be eligible for and whether your loan application will be approved.

The Secret to Borrowing a Little Bit More Than 95%…

If your financial situation is robust enough, you may be able to borrow the necessary deposit and look for a lender that is willing to provide a 95% Loan to Value Ratio (LVR) without needing genuine savings, in contrast to finding a lender that will capitalize the Lender’s Mortgage Insurance (LMI) onto the loan for LVR’s exceeding 95%.

Before you make the choice to begin this journey, please take the time to consider seeking professional advice, as it is not a path that should be taken lightly and it is not a recommendation without knowing your individual situation.

Although it is theoretically possible to borrow the full amount of the property purchase price, lenders who are open to this are few and far between and you can expect to pay a much higher rate of interest.

How do I apply for a 95% mortgage?

A professional mortgage broker can help you when it comes to getting ready to apply for a home loan.

They will be able to assist with navigating the process of determining if you are likely to be approved. This will help you avoid any extra hits to your credit file.

A professional mortgage broker will be able to assess your borrowing capacity, establish how much of a deposit you need, give you a good idea of what the LMI premium will be, calculate your estimated monthly repayments, and offer you a range of options for your home loan, from the major lenders, non-bank lenders, or any other available credit providers.

Low Deposit Home Loan and Credit Scoring

If you are looking to borrow at a higher loan to value ratio, you will usually need to meet stricter lending criteria.

Which means you need to have good credit history, a higher credit score as the higher LVR home loans will use credit scoring as part of the application process, especially with the major lenders.

Credit score, most lenders use a form of credit scoring when assessing loans at a LVR of 95%, most of the LMI providers will use credit scoring as well.

In most cases, once a loan is over 80% LVR you will have to not only satisfy the lender’s criteria but also the LMI criteria, which is why the higher LVR loans have stricter criteria, or hurdles to overcome.

Some lenders have what is called in-house DUA which stands for “delegated underwriting authority”, which means that providing you meet the lender’s criteria, you also meet the LMI criteria.

Can I Borrow 95% LVR With No Genuine Savings?

The short answer is yes, but you should be aware that the number of lenders available may be reduced and you may have to pay a higher interest rate than usual.

Even though you will still need a deposit, it could come in the form of a cash gift or if you have been fortunate enough to receive an inheritance.

You may have been able to put together the required deposit by selling off a car or any other valuable assets you may own.

How Do I Pay Lenders Mortgage Insurance (LMI)

Most loans that are over 80% of the property value require Lenders Mortgage Insurance. This is insurance that protects the lender in the unfortunate event you default on your loan.

The costs can vary and usually cost between 2%-6% of the property’s purchase price. It is important to factor in this expense when budgeting for a home loan, as it is an additional cost and can’t be avoided.

How much is LMI?

It’s on a sliding scale, the higher the loan to value ratio, the higher the lender’s mortgage insurance will be.

The LMI provider determines the variation of this. Currently, there are only 3 options in Australia when it comes to LMI, either its QBE or Helia formally Genworth, while some lenders have their own in-house LMI provider.

Other factors that would impact the amount of the premium are:

  • What is the loan amount?
  • The size of your deposit, the less deposit usually means the higher the LMI cost you will incur.
  • Do you have genuine savings or non genuine savings?

Are There Any Risks With These Mortgages?

The lender is more likely to take on a greater risk when the equity in the property is low, than if the loan-to-value ratio (LVR) is lower with more equity present.

In the case of a loan with a high loan-to-value ratio, if the borrower defaults and the lender is forced to sell the property for less than the loan amount, the lender could incur a loss. This is why these loans are typically insured to protect the lender from losses, not to provide any benefit to you.

Despite this, you must still pay the premium amount.

Higher Interest Rates

Borrowing 95% of the value of a property will generally attract higher interest rates and fees than when borrowing 80%. This is because lenders see it as a riskier investment, and therefore they may require you to pay more for their loan. Other fees such as application fees, valuation fees to name a few.

Not all lenders offer 95% Loans

Due to the various lending criteria and risk appetite of different lenders, not all of them will offer home loans in which you can borrow up to 95% of the property purchase price.

Many online lenders will only offer loans to those who have a 20% deposit, while others will offer loans up to a maximum loan to value ratio (LVR) of 90%, and will either be inclusive of LMI or exclusive of LMI costs.

As an example, if a lender provides an LVR at 90% and capitalizes the LMI, this could mean that you may end up with an LVR of 92%. On the other hand, some lenders will cap their LVR at 90% which must include the LMI premium.

Which Lenders are the Most Competitive?

It is essential to stay informed of the changing landscape, as it is not a onetime answer that is set in stone. We strongly advise that you consult with a professional to ensure you have the latest information so that you can be informed of your options..

Is it Possible To Avoid Paying LMI?

First Home Guarantee Scheme (Formally FHLDS)

If you qualify as a first home buyer, you may be exempt from having to pay Lenders Mortgage Insurance (LMI) as part of the First Home Guarantee Scheme, formally known as First Home Loan Deposit Scheme, however, this government initiative is limited to a certain number of places.

Use A Family Pledge

If you have a guarantee such as your parents, you could borrow up to the full amount without having to pay any Lenders Mortgage Insurance (LMI).

Using a family pledge where you are allowed to use the equity in the guarantee’s property as a substitute for having a deposit, the lender will take the guarantee’s property and the one you are buying as security, typically in the form of a limited guarantee.

Which Loan Features are Available?

When you are looking at lenders who offer higher loan to value ratio products, you should find that they usually offer the same features that you would get with a lower loan to value ratio.

In many instances, the product is the same as one you would get with a larger deposit, but the purchase price is higher.

Common Features of 95% LVR Home Loans

Redraw

split loans

100% offset account

Visa Debit Card

Phone Banking

Internet Banking

Repayment Frequency

Weekly, fortnightly or monthly repayments

Additional repayments,

Next Step

Home buying is a challenging process to understand, and it can be daunting to reach the point of being prepared to apply.

If you’re currently in the process of deciding on your next property purchase or if you have any questions regarding if the 95% loan to value ratio is something that is achievable for you, please don’t hesitate to reach out to us and book a Free Consultation so we can help you determine where you are at in your home buying adventure.

We promise no sales pitch.

 

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Alex Sperling - Finance/Mortgage Broker

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