For many Aussie home buyers, saving for a 20% deposit on home loans is not just feasible. Although you’ll get higher chances of getting a loan approved with a higher downpayment, as well as better interest rates, saving such amount can be a challenge for the average Australian. It’s a good thing there are home loans that offer a 5% deposit on the total value of the property. These are called 95 home loans. What is it and can you get one?
What is a 95% home loan?
95% home loans are also 95% LVR loans where LVR stands for the loan-to-value ratio of the loan. This loan type means you are able to take out a low deposit loan for as little as 5% deposit on the home property. The standard is at 20% deposit for most home loans.
Many Australian lenders consider this type of loan as high risk compared to the standard 80% LVR at 20% deposit loan. Where lenders find the loan to be high risk, the application process is stricter and may require the borrower to get an LMI (Lenders Mortgage Insurance). For these types of loans, interest rates are higher than the average home loan.
How to Qualify for 95 Home Loans in Australia?
Lenders are looking at two things above others to qualify you for a low deposit home loan. One is your deposit and the other is a steady income. First time home buyers may use the First Home Owners Grant as a deposit and less than 5% deposit if you are going to spend on LMI. A steady income means a regular income. If you have a strong financial position, you can even qualify for huge interest rate discounts.
Other conditions to regular 95% home loans
Traditional banks will deny your application if you don’t meet their conditions. But there are specialized lenders who can still extend help.
- Genuine savings: The majority of lenders favor a deposit that you have ended up saving on your own. Although this isn’t a standard loan requirement for most lending companies, hard-earned savings can mean a lot to lenders.
- Location of the property: Remote locations are most likely to be considered over metro locations.
- Debt. A small amount of debt can be acceptable. Note though that most lenders are strict when it comes to borrowers having a huge amount of unsecured debt. You can still be considered if you have a balance of less than 10% of the total purchase price such as in personal loans and credit cards.
- Credit Rating. There could be many and varied reasons for a poor credit rating. However, many loan companies can look beyond credit rating and gauge your financial situation using common sense.
- Credit record: When you have negative marks on your credit report, most traditional banks will say no to your application. But there are lenders who can consider this and can still allow you up to 95% plus LMI. However, with the new Comprehensive Credit Reporting, a positive effect on your credit score might be observed, mostly if you have positive financial activities to boast.
While it is possible for you to get a 95% loan, there are a few things you should consider as follows:
- Lenders Mortgage Insurance (LMI). This is an insurance to protect the lender. Use an LMI calculator to give you a rough estimate of how much you should be paying for an LMI on top of your 5% deposit. LMI can also be capitalised which will add up to the total amount you are borrowing.
- Higher interest rate. Expect that lenders may charge you with higher interest rates compared to standard loans.
- Smaller deposit loans mean you are going to pay more interest payments over the life of the loan. Use a loan repayment calculator to know your total interest payments.
95 home loans are low deposit loans that give a chance for Australians to own a home despite having lesser savings for a deposit. This could be an easier route for many who are having a hard time saving up for the standard 20% deposit.