Reduce the size of your deposit and increase your cash flow
Recent regulatory changes have seen most banks and lenders limit the number of 90% and 95% investment loans they will approve, with almost all of them no longer offering 97% investment loans.
A 97% investment loan allows you to capitalise or add the cost of Lenders Mortgage Insurance (LMI) on top of the mortgage so you can potentially save thousands of dollars in upfront costs.
There are a number of risks involved with high LVR investment lending, especially when it comes to 97% investment loans, which is why lenders require you to meet strict requirements.
The lending criteria includes:
- A 3-5% deposit: As a general rule, you need to have have 3-5% of the purchase value saved as a deposit. There are some lenders that will accept equity in another property as a deposit.
- Sufficient income: You don’t need to earn a big income to qualify for a 97% investment mortgage but you do need to be able to afford the mortgage repayments as well as other commitments you may have, such as bills and existing debt, without any hardship.
- Strong employment history: You’ll need to have been in your current job for at least 6 to 12 months. However, this requirement can be mitigated if you have existing history in the same industry.
- Clean credit history: To make sure that your credit file is clear of black marks, pay your bills, rent, credit card repayments and other commitments on time over a period of 6 months. Too many credit enquiries can also damage your credit file.
- Little to no debt: Lenders prefer borrowers who don’t have a lot of debt so having multiple credit cards or personal loans can work against you when you apply for a 97% investment loan.
Want to know if you’re eligible for 97% LVR investment loan?
Please call us on 1300 889 743 or fill in our free assessment form and one of our mortgage brokers will help you find out.
How does a 97% investment loan work?
There are only a handful of specialist lenders who will allow you to borrow 97% of the purchase price.
Generally speaking, when you’re borrowing more than 80% of the property value the bank will charge a one-off fee known as LMI, a cost charged by the bank and designed to protect them from loss in the event that you default on your mortgage repayments.
In addition to this, you’ll need to pay this cost upfront, along with the other costs of completing a property purchase such as stamp duty and conveyancing fees.
The great thing about 97% investment loans is that the cost of LMI is “added” or capitalised on top your mortgage.
So although you won’t avoid LMI completely, a 97% investment loan means:
- You won’t need to pay the LMI upfront.
- Your LMI will be paid off with your normal mortgage repayments at no interest.
- You won’t need a big deposit to complete the investment because you’ll be saving thousands upfront.
Will 97% investment loans disappear from the market?
The financial watchdog, the Australian Prudential Regulation Authority (APRA), recently introduced changes to the bank’s investment lending policy to curb what they believe to be a ‘property bubble’ in the Australian property market.
These changes require banks and lenders authorised by APRA, otherwise known as Authorised Deposit-taking Institutions (ADIs), to hold a certain amount of capital in the event of a market crash.
As a result of these changes, a number of banks, building societies and other ADIs have started to limit high LVR investor lending, particularly investment loans for 90% LVR and higher.
Despite this, it is still possible to borrow 97% LVR if you apply with a specialist lender.
Interest rate discounts
Do I qualify for any discounts?
Unfortunately, there are no interest rate discounts on offer if you’re borrowing 97% LVR. On top of that, since high LVR lending is considered to be a high risk, you may be looking at a slightly higher interest rate than normal.
Luckily, we can help you qualify for the same interest rates as someone borrowing less than 90% LVR depending on the strength of your situation.
Can I reduce the LMI premium I have to pay?
As mentioned above, LMI is charged by the bank in order to protect them from loss in case you default on your mortgage. It is generally applied when you’re borrowing more than 80% or more of the property value.
If you can save up a bigger deposit and bring down your LVR to 95%, this will put you in a lower LMI rate bracket meaning you’ll be charged a much lower mortgage insurance premium.
Is it possible to avoid paying LMI altogether?
Did you know that there is a no deposit home loan solution where you can ask your parents or a close relative to secure your mortgage with their property?
Known as a guarantor loan, it allows you to borrow up to 105% of the purchase price, which is the value of the property plus the additional costs that come with buying a property in Australia including stamp duty and legal fees.
There are only two or three lenders that will accept a no deposit option for the purposes of purchasing an investment property so please complete our free assessment form to find out if you qualify.
How have assessment rates changed?
Although there have always been assessment rates, banks and lenders now use a much higher interest rate than they did in the past. Today, it’s about 1-2% higher than the bank standard variable rate.
To explain, if the standard interest rate on your mortgage is 5.5% then the lenders will assess your ability to continue to make your investment loan repayments in the event interest rates increase by using an assessment rate of 7.5%.
Need help getting approved?
Each bank uses their own assessment rate so call us on 1300 889 743 or fill in our free assessment form today!
We can help you apply with a lender that has less stringent lending guidelines when it comes to 97% investment loans.
To find out more about these investment lending policy changes, check out this blog.
How will mortgage exposure limits affect my borrowing capacity?
As a general rule, a bank will only allow borrowers to have up to $1 million in debts and loan facilities. This is known as your mortgage exposure limit.
It catches a lot of borrowers off guard, particularly when they’re looking to build a property portfolio.
Depending on the value of the investment properties you already own, your application could be quickly declined by most banks and lenders. Despite this, there are lenders that will accept up to $10 million in exposure.
Call us on 1300 889 743 if you’re looking to rapidly build your property investment portfolio but don’t want to get knocked back by a bank.
What if I have more than one investment property?
The recent changes to investor lending imposed by APRA has had a massive impact on the borrowing power of applicants who have multiple investment properties.
In the past, most banks would’ve considered negative gearing benefits and your current debts would be assessed at the interest rate that you’re actually paying when they assess your ability to make mortgage repayments. This is known as your “serviceability” for an investment loan.
Today, only a handful of lenders will include tax deductible interest while assessing your mortgage and will assess your existing debts and loan facilities at a higher interest rate than the actual interest rate that you’re paying.
In addition to the assessment rates, the increased interest rates that banks now charge for investment loans means that it’s much easier to exceed a bank’s mortgage exposure limit, which is the limit on the debt you can have with any one lender.
If you have total debts of more than $1.5 million then banks are particularly wary about lending to you.
Do you already own 2 or 3 investment properties or are you looking to rapidly build a property portfolio?
Call us on 1300 889 743 or complete our free assessment form and we can help you avoid exceeding mortgage exposure limits so you can continue to borrow.
What are the costs involved?
All standard home buying costs apply to investing in property, including:
- Conveyancing fees
- Valuation fees
- Stamp duty
- Title transfer fees
You can use the property costs calculator as a guide to get an estimate of these costs.
Speak to a mortgage broker today
Getting approved for a 97% investment loan can be tricky. You need to present a strong case and apply with the right lender to be eligible.
Do you need help applying for a 97% investment loan?
In fact, many of our brokers previously worked in the credit departments of banks and major lenders as the officers actually approving and declining 97% investment loans!
Call us on 1300 889 743 or complete our free assessment form and speak to one of our brokers today!