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Home Loans 101
May 14, 2019

High LVR Loans

Housing affordability has been an issue for on-going generations, but what is growing each year, is the number of people who simply cannot afford to buy.  Their biggest hurdle, with wages not keeping up with growing property prices, is saving for a deposit.   It would seem though, that at the eleventh hour, ahead of the federal election this weekend, both the Federal Government and the Opposition intend to assist first home buyers.

Election Promises from both sides

Under the Coalition’s “First Home Loan Deposit Scheme”, first home buyers who are struggling to reach the 20% deposit requirement by lenders will be given a opportunity to apply for a home loan with as little as a 5% deposit.  They will not be subject to Lenders’ Mortgage Insurance (LMI) as the government will underwrite their home loans and will serve as guarantor, which is effectively giving them a 15% government loan.

The Government plans to start the program by January 2020, making it available to single first home buyers earning up to $125,000 annually and couples earning up to $200,000 p.a.

In response to the Coalition’s proposal, the Australian Labor Party committed to matching the scheme with a similar policy that would help ensure affordability.

However, before you get too excited, commentators have estimated,

the scheme will help only about one in ten first home buyers.  So what about the other nine?

 

We’ve all seen so many articles over the years that say you need 20% deposit to buy.  While a 20% deposit may be ideal, it is not your only option and shouldn’t hold you back from buying!  Having a bigger deposit, will however, give you additional benefits:

  • Better rates
  • No LMI (lenders mortgage insurance)
  • Smaller end loan, so cheaper repayments

Alternatively, a home buyer can sometimes borrow up to 95% of the purchase price for the house/ apartment. What this means is that as a first home buyer (if you meet the FHOG requirements and stamp duty exemption) you only need to have saved around 5% of the property price.  As a next home buyer, you’ll need a bit more to cover stamp duty.

So, while it is possible to borrow this higher amount, it’s important to understand the associated short and long term costs,  as well as the additional risk.

Costs

At the moment – LMI

LMI is dependent upon the loan to property value ratio (LVR).  If you borrow above 80%, you need to pay LMI.  The amount payable is tiered, so an LVR of between 80% and 90% of the property value will be at one rate, 90-95% will be higher, and then even higher again if you’re one of the few who qualify to borrow above 95%.

(See our LMI article for more information)

Post “First Home Loan Deposit Scheme” introduction

Once either Scheme is introduced, whilst first home buyers won’t need to pay LMI, it is still unclear as to how the banks will view this.  At the moment, first home buyers who have saved a 20% deposit, are considered lower risk clients by the banks, so usually qualify for cheaper home loan rates.

If they have saved only 5% and have the other 15% by way of the government loan, how will the banks view this?  Even if both the government loan and the 80% bank loan have the same interest rates, your combined mortgage repayments will be higher because you have borrowed more money.  This will need to be assessed as such, by the bank to see if you qualify for the loan.

Risk

With a single (or combined bank and government) loan of 95%, you would have only minimal equity in the purchased property.  If property prices fall, you could find yourself in a negative equity situation.  This situation, whilst not ideal, is still OK as long as you can continue to make your mortgage repayments.  If circumstances change, and you can’t pay your mortgage repayments, the banks can negotiate a financial hardship arrangement with you.  The last thing a bank will want to do, is foreclose and sell your property.  Their hope, as would be yours, is that the property price would rise again and you would regain your equity position.

 

So whilst not for everyone, smaller deposit loans are available.  For example, you may have just finished university and not had an opportunity to save, but are now earning a good income.  Similarly, you may have a great income but are struggling to save a deposit because you’re also paying rent.

The important thing to remember is that you do have options!

If you would like to learn more about buying a home, we encourage you to sign up for our “Insider Advice” Guide , specifically designed for first home buyers.

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