Home Loan Rate – Australia

What does the term “95% home loan” mean?

When a home is purchased, some lenders will offer a mortgage for 95 percent of the price of the home. Refinance loans are not eligible for this type of loan.

At the closing table, the borrower must provide the other five percent to complete the purchase of the property. In addition to the cost of the property, the buyer must have enough money to cover all closing costs including legal fees and stamp duty.

Do all lenders offer 95% home loans?

Following recent events in the lending markets, banks have reduced the percentage of the home price offered through a mortgage loan. The maximum LVR for most lenders is 90 percent or less. Mortgage lenders are aware that selling the mortgaged security to another institution is not possible when the loan balance is close to 100 percent.

When a 95 home loan is offered, the lender can be left holding the property if the borrower is unable to sustain the payments on the loan. The mortgage insurers carry the risk of loss when a 95 home loan is underwritten. Since the insurers are less likely to insure these high-percentage loans, the banks are unwilling to offer or approve the 95 home loans.

Market competition is driving more lenders to offer 95% home loans!

Mortgage insurance pricing is becoming more affordable for institutions that offer 95 home loans. Since the risk can be mitigated by insuring the mortgage, large banks are more willing to offer a 95 home loan option to borrowers who meet the stringent qualifications.

What causes 95 home loans to vary in cost?

Perceived risk of default will drive up the cost of a 95 home loan. Lenders will require extensive proof of ability to pay from the borrower prior to offering the 95 home loan. If the mortgage insurer charges the bank more money to accept the risk, the price of the loan will increase through the interest rate that is offered. Mortgage insurance costs are passed on to the borrower.

Most lenders have very high requirements to prove that the applicant can afford the loan and will make payments on time. This information is then provided to the mortgage insurer as proof of lower risk.

Contact multiple lenders prior to agreeing to the terms of the loan since mortgage insurance will affect the cost of the loan. The cheapest loan may not offer the best terms in the long run.

Two approaches to lenders mortgage insurance

Lenders follow one of two methods for calculating the actual percentage of the loan offered. The first method includes the cost of mortgage insurance by adding the premium charged to the loan value. This approach will drive the percentage of the loan up to 97 or 98 percent. More risk is carried by the lending institution.

The second method is to require upfront payment of the insurance premium at the time of settlement. This approach ensures that the insurance is paid prior to the completion of the loan agreement.

Many lenders are adopting the second method as part of the proof that the borrower has sufficient funds to afford the loan. Since the loan applicant must qualify for the 95 home loan and then pay the insurance cost, the bank perceives less risk and will underwrite the loan.

Qualifying for a 95 home loan

Since the home loan covers a very high percentage of the home price, the borrower will be required to provide substantial proof of his ability to pay. The application will require detailed information concerning every aspect of the financial history. Even if the applicant can pass the lender’s approval process, the mortgage insurer will be given the opportunity to review the application. High-percentage loans will have more stringent insurance requirements since the perceived risk of default is higher. When the lender is also the mortgage insurer, the terms can be easier to meet.

These are some of the most important qualifications that 95 home loan applicants must meet:

1. Savings habits – Lenders rely on this factor more than any other when considering an applicant’s ability to afford the 95 mortgage. The savings account must contain the entire five percent of the home price and reveal a track record of saving money for at least the previous six months.

Active savings habits that continue during the home loan approval process are an indication to the bank that the borrower has the cash flow necessary to continue to make payments and maintain the property. Some banks will not approve the loan if deposits to the bank account have not been consistent.

If the borrower is not able to prove the existence of genuine savings, the lender will not proceed with the approval process. The perceived risk will be too great to approve the mortgage so the process will stop.

2. Flawless credit history – Lenders require the applicant to have a credit history that has zero adverse comments. There are not exceptions to this requirement when applying for a 95 home loan. Every outstanding debt must be in good standing for the past six months without any late payments.

3. Stable employment – Applicants must have full time employment for the previous 12 months with the same employer. Some exceptions can be made for someone with six months of employment with the same company and more than two years in the same industry. Lenders will accept some other variations.

4. Readily saleable property – The property to be purchased must fall within the standard guidelines set forth by the lending institution. Remote locations, high-rise condominiums, and very small properties will not be considered for high-percentage loans by most lenders. Prior approval of the property will save time and frustration by the applicant and the lender.

5. Age-appropriate asset ownership – Many banks are willing to approve 95 home loans for applicants with steadily growing asset portfolios. If the debt ratio is very high and credit has been used excessively, the 95 home loan is not likely to be approved.

Are there maximum loan amounts for a 95 home loan?

Theoretically, a borrower can find a lender willing to loan up to $1,000,000 at 95 percent of the property price. Since the mortgage insurers set the actual insurance amount for the mortgage security, most lenders have lowered the actual loan amounts to $650,000 in metro areas. For properties located in rural areas, the loan limits are lower because of the speciality properties that exist on the market. At the beginning of the application process, provide the postcode to the lender since the loan limits are tied to property location.

Home mortgage lenders evaluate the entire financial package of the borrower. People seeking to purchase a property worth $1,000,000 or more should be able to save more than five percent of the purchase price. Banks evaluate the ability to repay the loan through a complete financial evaluation and expensive properties will be scrutinized more closely to prevent default on the home loan.

Get a 95% mortgage today.

If you save up a 20% deposit on your home loan, this allows you to avoid needing to pay for lender’s insurance. Unfortunately, this isn’t always a possibility. If you can afford a 15% deposit, however, this is still much better than a 90% or 95% loan.

You can use either a 15% deposit or 15% equity in another property to apply for an 85% home loan. This offers the bank reassurance that, even if you were to foreclose, they would be more likely to break even. In most cases, you can apply for an 85% mortgage for any purpose, whether you will be buying the home for yourself, as an investment or to refinance you loan.

Some lenders will have no limit on the the amount of money that you can “cash out” on, while others will set a limitation of 20% of the value of the loan. Regardless of the lender, you will almost certainly be required to bring documentation explaining what the money will be used for.

If you have saved up a 15% deposit, you have done more than many other borrowers are willing to do. Some banks may try to convince you that you haven’t saved up enough. For this reason, it is a good idea to get in touch with a mortgage broker. In some cases, they may have deals with the lenders that allow you to apply for a mortgage with no lender’s insurance, even though you haven’t saved up the standard 20% deposit. Even if this isn’t possible, a mortgage broker will be able to find the best deal in the shortest amount of time, simplifying the process a great deal.

Lenders also consider “genuine savings” to be an important part of the decision. Genuine savings are the funds that you have saved up in addition to the deposit. In most cases, a lender would prefer that you have saved up at least five percent of the value of the loan. There are some lenders who don’t require this. Once again, a mortgage broker can be helpful in finding these lenders.

That said, whether or not a lender will be willing to work with you shouldn’t be your only consideration. The extra five percent of genuine savings provides you with a buffer that will protect you from any unexpected costs that you might have to deal with. Most financial experts will argue that it is best to keep all of your basis covered. The last thing that you want to deal with after purchasing a home loan is additional debt.

When comparing lenders, it is important to compare not only the interest rate, but the cost of lender’s mortgage insurance. The ultimate questions are how much you will spend each month, and how much the loan costs overall. All other considerations are secondary.

Eligibility

Not everybody is eligible for an 85% home loan, of course. While every bank has it’s own criteria that they use to determine whether or not to offer any particular loan to any particular borrower, here are some of the most common factors that they take into account.

First of all, your credit history will play an important part in the decision. With a 15% deposit, it is not quite as important that you have a completely clear history. It is, however, helpful to have a credit report free of any seriously negative decisions. Ideally, you will have made all of your payments on time for the past six months, including rent, credit cards, and other loans. This is especially important if you hope to avoid paying for lender’s insurance.

In most cases, the lender will also prefer that you have at least six months of employment with your current employer. This is not always a necessity, but it can make the application process more difficult if you don’t meet this requirement.

Your income is especially important. Your income is the source of the funds that you will be using to pay off the debt to your lender, and many banks consider it to be the most important factor of all. The higher your income in comparison to the cost of the loan, the better. Simply earning enough money to pay off the loan isn’t enough. Banks feel more comfortable if you will have extra funds leftover. Generally, it is a better idea to choose this type of loan anyway, as it is much less stressful to pay off, and provides you with the extra money that you need in order to enjoy yourself.

Banks will also consider your assets and your savings. They will often compare your current savings and assets to other people in your age. They feel that this says something about your reliability as a borrower. The more assets you have accumulated, and the more savings you have put away, the more responsible they feel you are as a borrower.

Apply for an 85% home loan.

There is no question about it, banks and lenders often require genuine savings in order to qualify for a loan.  However, this is not always the case.  Loans without genuine savings are possible, and can be made as long as you are in the right situation.  

You can be the proud recipient of a gift, or be the beneficiary in an estate proceeding where you are made an heir to a large amount of cash, or you made a windfall in the stock market by playing it smart.  All of the above mentioned items are not genuine savings but are viable deposit substitutes.  All that genuine savings does is make it less risky for the banks when they give out and approve a loan.  However, it is still not a guarantee that the repayments will be paid.  The same thing goes for no genuine savings, the banks and lenders may be taking more risks, but it does not immediately mean that the person with no savings will not be able to make the repayments.

Thus, all a person has to do is to prove that they have enough money to make a certain deposit amount, and that it does not have to be genuine.  The only difference is that the money is not kept in the bank for 3 to 6 months, which is usually the main indication whether a certain amount is genuine or not.

This means if you are in such a situation where you have enough money to make a deposit, but the only problem is that it is not genuine and you are fortunate to have such an amount on hand, then you can consult us, the home loan experts.  We can provide you with the necessary information on no genuine savings loans, and how to maximize their use.  Enquire online now for free!