Everyone knows that before one can buy a house, a certain amount of money for deposit is required. When applying for a loan, lenders will also require borrowers to show proof that they have some cash to cover the deposit.
This is why a lot of people who want to buy a house save up enough money first so they can pay for the down payment. Typically, a borrower will need to save at least 20% for the deposit.
However, not a lot of people have that kind of money. Some only have a few dollars in their savings account. Does this mean these people will not be able to borrow money to buy a house?
Wrong. Today, even if you only have 5% deposit, you can already apply for a home loan because lenders have made 95 home loans available to interested home-buyers.
This type of home loan is the next best thing to no deposit home loans, which are no longer in Australia. This is actually a great deal because most lenders are only willing to loan up to 80% LVR. Anything higher than that is already considered high risk.
So does this mean 95 home loans are risky?
Not really. While it is true that loans that are 80% of the property value are risky and would therefore come with a high interest rate, 95 home loans are less likely to be made available to high-risk borrowers. Why?
Before we get to that, let us discuss why loans with 80% LVR are considered risky. Lenders have become very strict when it comes to lending money because they are trying to minimize the high number of people who default on their loan. When people default (not pay) their monthly mortgage payments, the lenders incur a loss.
To avoid that, they have implemented stricter rules in loaning people money. Generally, those who apply for a mortgage insurance need to prove that they have the ability to pay off the loan and that they are financially responsible.
Borrowers need to provide documents that would prove they have stable employment and at the same time show lenders that they are responsible when it comes to their finances. This is evidenced by their credit score, which is a very important requirement in obtaining a loan.
Someone who passes these qualifications is going to get a loan very easily. They are most likely to get a good deal. They do not need to have a very impressive record. As long as they can prove they can pay off the loan, then they are good to go.
Typically, lenders approve up to 80% of the purchase price. The remaining 20% has to be shouldered by the borrower by paying for the deposit. A certain percentage of that money has to be genuine savings. On top of that, the borrowers will need to pay LMI to serve as insurance for the loan.
Those who do not meet most of the requirements are either going to be refused a loan or given one that has a higher interest rate. This is because they are considered hi-risk borrower or someone who is most likely to default on a loan.
So the higher risk you pose, the higher interest rate you are going to pay, and the higher amount of deposit you will need to shoulder. Normally, the bigger loan you get, the higher the rate as well.
So does that mean 95 home loans will also have a higher rate?
No. Here’s why:
Lenders can only lend so much money. They would not want to give large sums of money to people and risk incurring losses. Logically, if they were going to approve loans that have 95% LVR they are going to make sure that these are awarded to select people–those who have extremely impressive credentials. These are people who can definitely afford the loan; those who pose very little, if none, risk. And because of that, these loans are not going to have high interest rates.
And because only 5% of the property price is left, it’s easier to pay for the deposit. This is why those who do not have a lot of money meant for a deposit can qualify for this kind of loan.
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