For a while following the Global Financial Crisis (GFC) , it was almost impossible to borrow more than 90% of the property value.
Even today, there are only a few lenders that will approve 97% home loans, which is essentially a 95% home loan with the cost of Lenders Mortgage Insurance (LMI) added on top of your mortgage, saving you thousands in upfront costs.
By building a strong case, it is possible to borrow 97% LVR (Loan To Value Ratio) so you can get into the market sooner with a low deposit.
How do I qualify
Most lenders consider home loans for more than 90% LVR as a high risk, so borrowing 95-97% of the property value requires you to meet certain requirements.
- Your income must be sufficient: You don’t need to be earning a big income but you do need to be earning enough to afford the home loan as well as your other commitments like bills and existing debt without hardship. This is otherwise known as meeting the bank’s ‘serviceability ratio’ requirements.
- You need a strong employment history: A stable job that you’ve been in for the past 6 to 12 months is a general requirement for 97% home loans although some lenders aren’t as strict with this policy.
- Your credit history must be clean: Ensuring that you pay your bills, rent, credit card repayments and other commitments on time over a 6 month period will ensure that your credit file is clear of black marks.
- You have little to no debt: Having a lot of debt such as multiple credit cards or personal loans is generally not accepted. Anything less than 5% of the purchase price for the property you’re looking to buy may be accepted on a case by case basis.
- You must have a sufficient asset position: This basically means that, depending on how old you are and your income, you should have a comparable level of assets such as a car, shares or a term deposit.
- There are postcode and property restrictions: Your likelihood of getting approved for a 97% home loan also comes down to the nature of the property as well as its location. Banks are reluctant to approve mortgages for security (the property) that will likely be difficult to sell in the event that you default on your repayments.
- You need at least 5% genuine savings: The genuine savings requirement is a policy that most Australian lenders have. You need at least 5% of the purchase price that you’ve accumulated with regular savings into a bank account over a period of 3 months. Luckily, not all lenders have this genuine savings requirement and will accept a gift from your parents instead.
Do you need help getting a 97% home loan?
We’re low deposit specialists who understand high LVR policies.
Call us on 1300 889 743 or complete our free assessment form and one of our mortgage brokers can tell you if you qualify.
How does it work
There are only a few lenders that offer 95% home loans and even fewer that will allow you go to 97% or higher.
So what is this extra 2% for?
Well, when borrowing more than 80% of the purchase price, the bank will charge a one off charge for mortgage insurance or LMI.
Because loans over 80% are considered to be risky, LMI protects the banks in the event that you default on your mortgage repayments – it doesn’t protect you as the borrower. Nevertheless, you still have to pay this premium!
On top of that, you’ll usually have to pay this cost upfront, along with the other usual upfront costs of completing the purchase, including stamp duty, conveyancing fees and other legal costs.
If you qualify for a 97% home loan, you won’t avoid the cost of LMI completely but what the lender will do is “capitalise” or “add” the cost of LMI on top of your home loan.
By doing this:
- You won’t have to pay this cost upfront.
- You simply pay the LMI off, at no interest, with your mortgage repayments.
- You won’t need as big of a deposit to complete the purchase because you’ll potentially be saving thousands upfront.
Do all lenders cover the full amount for LMI?
Generally speaking, LMI works out to be around 2% of the property value, although, depending on the property’s purchase price, it’s usually closer to the 2.5% to 3% mark.
For example, if you wanted to borrow $570,000 for a property in Sydney worth $600,000 (95% LVR home loan), your LMI could be as much as $28,591, which is equal to about 4.77% of the property value.
Now, some lenders will only lend you to borrow 2% of the property value to cover the cost of LMI, which, in this example, works out to be $12,000. What that means is that you’d still have to cover around $16,591 in upfront costs in order to complete the property purchase.
Luckily though, not all banks have the same policy and will cover the full amount for LMI even if it goes over the 2% mark so you can essentially borrow up to 97.5-98%.
When it comes to 97% home loans, choosing the right lender is essential.
You can get a more accurate estimation of the cost of LMI for the property that you’re looking at buying by using our LMI calculator.
Do I need genuine savings?
When you start borrowing more than 90% of the property value, most lenders require you to have genuine savings equal to 5% of the purchase price.
Genuine savings can be in the form of shares or a term deposit but it most commonly refers to regular deposits in a bank account that you’ve accumulated over a period of 3 months.
Showing evidence of a growing bank balance is a reflection of your ability to make regular mortgage repayments.
Most lenders won’t accept this as genuine savings but we may be able to help you qualify with a non genuine savings lender!
Our mortgage brokers understand how tough it is to save a deposit in today’s rising property market, particularly if you’re a first home buyer and you’re currently renting.
Stop spinning your wheels and give us a call on 1300 889 743 or fill in our free assessment form to speak with one of our highly experienced low deposit specialists today.
Can I borrow more than 97%?
Yes, there are lenders who will cover you for more than 97% of the property value depending on the cost of LMI but did you know that you may be able to borrow even more?
In fact, you may be able to borrow up to 105% of the purchase price, which is the value of the property plus the extra costs of completing the purchase including stamp duty and solicitor’s fees.
You can also avoid LMI altogether but how?
By asking your parents and a close relative to secure your mortgage with their property, you can get into the market sooner with no deposit!
Will I pay a higher interest rate?
Generally speaking, you may be looking at a slightly higher interest rate when borrowing more than 90% of the purchase price but it’s usually miniscule.
The reason is that your LVR is considered to be a high risk.
Despite this, we regularly find that we’re in a position to get you the same interest rate as someone borrowing less than 90% depending on the lender and the strength of your situation.
Why is it important to compare LMI rates?
When most Australians are looking to get a home loan, they focus most of their attention on getting a cheap interest rate. Rarely do they consider the LMI premium rates of the lender that they’re going with.
Overlooking LMI rates is can be a costly mistake but, considering the fact that the banks don’t advertise these rates to the public, it’s no wonder it’s rarely ever considered!
LMI rates increase quite rapidly once you start borrowing at the 90%, 95% and 97% mark and the lender may even charge a premium loading depending on what type of borrower you are.
For example, self-employed borrowers can be charged a 10% LMI premium loading while no genuine savings applicants can be charged as much as 30%.
Lender choice is the key.
Speak to a mortgage broker today
Our mortgage brokers are low deposit home loan specialists, many of them with a number of years of experience working in the credit departments of major banks and lenders.
They understand 97% home loan policy and have a range of lenders to choose from to get you the right home loan for your needs.
High LVR home loans come with strict lending requirements so call us on 1300 889 743 or complete our free assessment form to discover if you’re eligible for a 97% home loan.