When you decide to enter the property market and take out a home loan, it’s important to understand all the ins and outs of mortgages. It’s highly likely that you won’t have enough money to buy a property outright, so you will probably need to take out a home loan.
However, the type of home loan you choose, the deposit you can put down and the most attractive offer you can find depends on your financial standing and a number of other factors. Before you visit a lender or broker, it’s advisable to conduct some research so you know what your options are.
Have a look at our guide to 95 per cent LVR home loans to get your head wrapped around them before you take the plunge.
What is a 95% LVR home loan?
A 95 per cent LVR home loan is a type of low-deposit home loan for which you are only required to have 5 per cent of the total property’s value to put towards a deposit.
‘LVR’ is an acronym for loan-to-value ratio, which refers to the amount you are borrowing, represented as a percentage of the value of the property being used as security for the loan. When a lender looks at how much you want to borrow, they will look at the deemed value of the property against how much of a deposit you can put down. That’s why a 95 per cent LVR home loan only requires a 5 per cent down payment.
Many standard home loans require a 20 per cent deposit, but there are other types of home loans available. They include 70 per cent LVR home loans, 90 per cent LVR home loans and 95 per cent LVR home loans.
What are the benefits of 95% LVR home loans?
Some of the potential advantages of taking out a 95 per cent LVR home loan include:
Entering the property market quickly – Because you only need a 5 per cent deposit, you can take out a loan and buy a home faster than waiting to save the standard 20 per cent deposit.
Easing short-term financial pressures – If you want to a buy a home but saving a lump sum for a deposit isn’t feasible in the short term, a 95 per cent LVR home loan could temporarily relieve some of the financial burden.
Taking advantage of low interest rates – You could be able to enter the property market when favourable interest rates are available even if you don’t have enough for a standard deposit.
What are the drawbacks of 95% LVR home loans?
As with all loan options, there are also some potential disadvantages to 95 per cent high LVR home loans:
Lender’s mortgage insurance – 95 per cent LVR home loans often come with lender’s mortgage insurance (LMI), which offers protection to the lender – not you – if you default on the loan. LMI can be hefty, so you’ll need to consider if the cost is worth it.
Borrowing more money – Because you’re only putting down a 5 per cent deposit, you’ll be borrowing 95 per cent of the property’s value, which could mean higher monthly repayments and a longer loan term than with a standard 80 per cent LVR home loan.
Rates could rise – Even if you enter the property market quickly to secure a favourable interest rate, those rates could change at any time (except for during fixed rate periods).
Features of 95% LVR home loans
Home loans with a 95 per cent LVR typically have similar features to other types of home loans, but the associated rates and fees may differ. For example, a lender might choose to offer a more favourable interest rate to customers who can put down a larger deposit.
Aside from the interest rate and deposit amount, though, here are some of the other common features to consider:
- Fixed rate or variable rate – You can usually decide whether to lock in an interest rate for a set period or have a variable interest rate.
- Repayment options – Some lenders will allow you to make additional repayments above the minimum, so you can pay off your loan faster and avoid interest.
- Redraw facility – Some home loans come with the option to redraw additional repayments you’ve made if you need the money down the track.
- Offset account – You may be able to have a bank account linked to your home loan, known as an ‘offset account’. Your lender attributes your account balance towards your loan so you only have to pay interest on the difference.
- Loan term – Usually, the term for a home loan is 25-30 years.
Consider speaking with a financial adviser to discuss your situation before sitting down with a lender or mortgage broker. You can also use RateCity’s home loan comparison tool to see what’s currently available in the market.