The seven things to keep in mind when considering a 95% LVR: John McGrath

As competition remains high for mortgage business, many lenders including some of the major banks are prepared to offer finance with just a 5% deposit.

A 95% loan-to-value ratio loan is primarily aimed at first-home buyers who have not been able to save up a bigger deposit but who want to get onto the property market sooner.

However eligibility for a high LVR loan is quite strict, writes McGrath Real Estate Agents chief executive John McGrath on Switzer.com.au.

Here’s the seven key things he suggests you consider beforehand:

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McGrath says that banks will require that you can “at a minimum” demonstrate a strong repayment history and will want to know what the purpose of the loan is. If it’s to purchase an investment property, they may only lend 90% of the value. 

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You need to calculate if you will be able to make more in capital gains (and possibly rental returns if it’s an investment property) by purchasing sooner and paying Lenders Mortgage Insurance (LMI) than you would by waiting until you have saved up a 20% deposit. You must also factor in how much prices may rise in this time it takes to save a bigger deposit.

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Keep in mind that LMI will be much less if you are buying a $300,000 property versus a $600,000 even if you have only a 5% deposit in both scenarios. “Generally speaking, LMI is charged as a percentage of the purchase price,” says McGrath.

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Also keep in mind that LMI is not transferable so if you refinance with a new lender and don’t have a 20% equity position, you may have to pay it again. 

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Another risk, he says is that it may take longer to build up equity in your property or even be in a no equity position, which can make it harder to refinance or buy a second property. 

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Quoting advice from lan Hemmings, who heads up McGrath’s Oxygen Home Loans division, he says buyers should shop around if they are looking for a high LVR loan because the difference between lenders on LMI can be several thousands of dollars. 

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Lastly he suggests speaking to a mortgage broker who can help with all these questions and will know which lender charges the least LMI on a 95% loan.


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