Compare 95% of LVR home loans
Want to enter the real estate market earlier with a home loan with a 95% loan-to-value ratio? Compare 5% of deposit banks and lenders.
A 95% loan-to-value ratio basically means that you have a 5% deposit and the bank or lender is lending you the rest of the money. So on a property value of $ 500,000 that means you need a deposit of $ 25,000 while $ 475,000 will be loaned to you.
Before the global financial crisis of 2007-09, and later the Hayne Royal Commission of 2018-19, it was not uncommon for banks to lend more than this. However, 95% LVR is about the maximum you can find these days.
In a world where house prices keep rising, saving just a 5% down payment is a tempting prospect, especially since you can enter the market earlier. However, there are a few considerations you might want to note first.
Looking for a house? The table below shows some of the lowest 95% LVR (5% deposit) home loans on the market.
Advantages of 95% LVR home loans
Less time to save for a deposit
Saving money can be tedious. By saving just 5%, you spend less time saving. Or you can divert some of your savings to other assets, like stocks, or leave some in the bank for a rainy day.
Research on the estate indicates that it takes more than seven years for first-time homebuyers to save on a 20% deposit for an “entry-level home” in Sydney. Saving 5% would theoretically only take a quarter of that time.
Enter the market earlier
With less time to save, you can get your keys earlier and potentially start realizing capital growth. Watching your home rise in value could quickly make you forget that you are paying mortgage default insurance (LMI) and potentially a higher interest rate on your home loan. However, it should be noted that capital growth is not guaranteed.
Take advantage of the First Home Loan Deposit Scheme (FHLDS) and other stimulus measures
The FHLDS is a federal government initiative that allows first-time home buyers to get a 95% LVR mortgage without having to pay LMI. This represents a potential saving of several tens of thousands of dollars. However, places are limited and there are other restrictions as well.
States and territories also have various initiatives providing money to first-time buyers to pay for their deposit.
Refinance after building up equity
Equity is basically the part of the value of the property that you own – that is, the value of your property minus what you owe on the mortgage. Chances are, after about a year, you can refinance with 20% equity under your belt and get a more competitive mortgage rate. Of course, if you’re still stuck on a fixed rate home loan, you probably won’t be able to do it, unless you’re prepared to pay the breakage fee.
Disadvantages of 95% LVR Home Loans
Pay mortgage insurance from lenders (LMI)
LMI is a pesky insurance premium that you pay because the lender takes on more risk. This insurance covers the lender, but the borrower must pay for it. According to Genworth’s calculator, a 5% deposit on an owner-occupied home of $ 700,000 could mean an LMI premium of over $ 27,000 for a 30-year loan term.
LMI is often capitalized into the loan itself, resulting in a larger loan repayment. On top of that, you also pay back 95% of the value of the property, as opposed to 80% or less, which is a larger bi-weekly or monthly payment.
Higher interest rates and more interest paid
As the lender assumes more risk, you are more likely to face a higher interest rate. Plus, since you’re paying off 95% of the home’s value (which attracts interest), you’re going to pay a lot more interest over a 30-year term than on lower LVRs.
Risk of falling property prices
While this is true for any LVR, a drop in house prices is still possible, despite the strength of the Australian property markets. Owning more on the house than it is worth is called negative equity. While this is only a problem if you are willing to sell, negative equity is not a good feeling. And if you think of your deposit as a buffer against negative equity, less deposit equals less buffer, and there is more risk if house prices are heading south.
Photo by Jason Briscoe on Unsplash
The entire market was not taken into account in the selection of the above products. Instead, a smaller part of the market has been envisioned, which includes the retail products of at least the Big Four Banks, the Top 10 Customer-Owned Institutions and Australia’s largest non-banks:
Products from some vendors may not be available in all states. To be taken into account, the product and the price must be clearly published on the website of the supplier of the product.
In the interest of full disclosure, Savings.com.au, Performance Drive, and Loans.com.au are part of the Firstmac group of companies. To learn more about how Savings.com.au handles potential conflicts of interest, as well as how we are paid, please click on the links on the website.
*Comparison rate is based on a loan of $ 150,000 over 25 years. Please note that the comparison rate only applies to the examples given. Different loan amounts and terms will result in different comparison rates. Costs such as draw charges and cost savings such as fee waivers are not included in the comparison rate but may influence the cost of the loan.