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Playing scrooge: beating banks at their own home loans game

Playing scrooge beating banks at their own home loans game

Australian home buyers are facing some of the strictest lending requirements in recent years, as financial institutions demand more genuine savings before securing a home loan. But are Australians getting a raw deal, or are these the necessary precautions that every lender must make?

May 27, 2010

Lenders scared to ease their chains
Due to the disasters of subprime lending and risky practices in the United States, lenders across the world have been afraid to relax their standards. And the Reserve Bank of Australia has said any excessive reductions could be “outright damaging to long-run affordability”.

The 100 percent loan-to-value ratio (LVR) home loan, where you can borrow the entire value of a property, is officially extinct on the market. But you can borrow up to 95 percent of the value of a property in most cases.

In fact, owner-occupied home loans have experienced a sharp drop in their LVR. From the March quarter of 2009 to this year’s March quarter, loans offering LVRs over 90 percent have fallen from around 27 percent of all loans in 2009 to 15 percent in 2010.

Over the same period, loans with LVRs between 80 and 90 percent have risen by about 4 percentage points (16 percent to 20 percent), as borrowers are forced to save more before they acquire a home loan.

And while many will mourn the appealing 100 percent loans, which require no initial savings for a deposit, should borrowers be relying on these loans anyway? These loans place a high amount of debt and risk on the borrowers’ shoulders. If the price of the property falls after the purchase, the borrower will experience negative equity where they will suddenly owe more money than their property is worth.

When mortgage lenders are feeling ungenerous when it comes to LVRs, it’s up to individuals to make sure they are making the most of the market. You might be surprised by the discounts that lenders are willing to negotiate – which might include high-LVR home loans.

Borrowing less can save you more
Say that Natasha wanted to purchase a property costing $300,000. If she took up a loan at 7.5 percent over 30 years, choosing to borrow only 80 percent ($240,000) as opposed to 100 percent will save her at least $151,000 over the life of the loan. And this doesn’t include the fact that borrowing a greater percentage of the value of the property is likely to cost more in charges by the lender, including higher rates and lenders mortgage insurance.

And if Natasha shopped around for a cheaper rate of 7 percent and borrowed $240,000, she could save another $29,000 from her total repayment amount. In total, healthier savings and a search for a better deal has helped her save more than $180,000.

If you care about making savings as much as obtaining your next home, compare home loans for the lowest rate, and consider borrowing less. Being a scrooge isn’t just a game for lenders because ordinary borrowers can come out on top.

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