By Dan Cuthbert

Some 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 a 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?

The vast majority of lenders are limiting home loans to 90% of the property’s value plus Lenders Mortgage Insurance, therefore they are not available across the board. Some lenders are prepared to go to 95% plus Mortgage Insurance which can take you to in excess of 97% and some lenders don’t even want to see 5% genuine savings (these are rare). 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 First Home Owners Grant (FHOG) or a gift. The only thing that will not be allowed to cover the 5% is another loan.

Who will qualify?

Lenders who are happy to finance up to 97% will look closely at your employment status & history.

There are postcode restrictions. Lenders will consider going as high as 97% for properties in metropolitan areas with a 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 95% or higher LVR.

Most lenders though want to see the genuine 5% savings if they are willing to have an LVR as high as 97%.

How much will it cost?

The other good news is that those lenders who do not require genuine savings are not penalising borrowers by charging a higher interest rate.

Recent deals include securing a loan with a 97% LVR and no genuine savings for between 6% and 6.5% fixed for three years. If you want a variable loan the most competitive recent rates have been around 6.4%.

The catch is that you will 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 $12,000 instead of $6,000.

But if you hold off buying until you save the extra 5% it would not take long before the property values go up by more than $6,000.

Any other traps?

It is mostly first home buyers who are taking up these 95-97% home loan offers and they will need to know how to negotiate a good price on the homes they are 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 a strong savings habit.

It would not be advisable for clients still living at home with their parents and who have no savings and who think they will use a gift as their deposit to enter into such arrangements.