Choose the right 95% LVR Home Loan

Whether you’re borrowing to buy your first home or to add to your investment property empire, your Loan to Value Ratio (LVR) is important. Lenders see high LVR loans as riskier prospects, so higher rates may apply to higher LVR loans, as well as Lenders Mortgage Insurance (LMI).

If you don’t want to wait until you’ve saved up a bigger deposit, here’s what to know and how to choose between home loans with 95% LVR, which is generally the highest LVR Australian lenders will accept.

Read more: How big a deposit do you need?

What is a 95% LVR home loan?

A 95% loan-to-value ratio (LVR) means your bank is allowing you to borrow 95% of your total property’s value. If the price tag of the property is $580,000, a 95% LVR loan would mean borrowing $551,000 with a deposit of just $29,000.

These high LVR loans mean there is a greater chance of the bank making a loss if you default on the loan. Imagine one year into the loan term in the above example. There is $540,000 remaining outstanding on the loan, but shifts in the property market mean the home is now valued at just $520,000. This means if the borrower couldn’t pay the loan back, and the bank repossessed the house, it would still make a loss because it couldn’t recoup the full amount it was owed from selling the property. This is why these loans are charged for LMI, which is insurance to protect the banks in these cases.

The general threshold is that LMI premiums are charged on loans where the LVR exceeds 80%, so it’s often suggested buyers accumulate a deposit of at least 20%. In our example, this would mean a deposit of $116,000, which might mean several more years of saving. Borrowers who take out 95% LVR loans are therefore often anxious to get in the market as soon as possible, perhaps because they think property prices are heading up in future.

Read more: How much will your LMI premiums be?

How to compare 95% LVR Home Loans

There are still plenty of lenders who offer loans to borrowers with a 5% deposit. These include some of Australia’s largest banks: all of the big four currently offer loans up to 95% LVR as of 15 March 2024. Just as with any loan product, it’s important to check out and compare all of your options to find the one that most suits you.

Rates and fees

The interest rates on a 95% LVR loan are still usually the most important consideration. Many lenders have tiered rates, where the higher the LVR, the higher the rate the borrower pays. It’s always important to make sure to compare the comparison rate as well as the advertised rate, as this is a better representation of the true cost of the loan, including account keeping and establishment fees.

Important Information and Comparison Rate Warning

LMI cost

LMI premiums generally do not vary much across different providers since there are only a few insurers that provide it. However, there are some products where you might not need to pay LMI even if LVR is 95%

• First Home Guarantee Scheme (FHGS): Under the FHGS, the Government acts as guarantor for your home loan for up to 15% of the property value. That means you can buy with a 5% deposit and avoid paying LMI. This is only available for first home buyers and through participating lenders, with a limited allocation each year. Lenders who are part of the scheme include CommBank, NAB, and Westpac, but you can see the full list of participating lenders here.

• Exemptions: Some lenders have special offers where LMI can be waived. At Westpac for example, LMI can be waived for dentists, hospital doctors and nurses among many other medical practitioner roles, provided borrowers earn over a certain income.

• No LMI home loans: Non bank lender Sucasa does not charge LMI on its range of home loan products, including when LVR is 95%. Sucasa home loans are split in two: the portion up to 80% LVR and the remainder. Both loans are paid off simultaneously. With some products, the Accelerator rate is higher, while others have the same rate for both, but higher up front fees. Sucasa COO Adam Trouncer told InfoChoice Group that Sucasa aims to always have lower upfront costs and lower rates than any loan with LMI for a given LVR.

Features

Additional features like offset accounts and unlimited extra payments can help bring down the overall cost of a loan. Some lenders have less of these features on higher LVR loans.

Benefits of a 95% LVR Home Loan

The general consensus is an ideal deposit is at least 20% of the property price, since anything less usually means LMI and a higher interest rate. There are still a few advantages to higher LVR home loans though.

Get in the market sooner

Buying with a smaller deposit can mean buying property much earlier than waiting until you’ve saved the full 20%. If the price of the property goes up by enough, it can work out to be worth paying higher rates and LMI to buy sooner, and benefit from the price increase. Imagine you are a first home buyer looking at a property worth $600,000, but only have a 5% deposit ($30,000). This might mean LMI premiums of $31,008 (using the Your Mortgage LMI calculator), and paying a higher rate. Let’s say you decide to wait until you have a 20% deposit, but this takes another six years. If in the meantime, the value of the property has gone up to $800,000, you would have been better off taking the higher LVR option and buying earlier. Once you have paid down enough of the loan, you might also be able to refinance once your LVR drops, and get a lower rate.

Take advantage of the First Home Buyer Guarantee

If you are a first home buyer, the FHBG can negate much of the negatives to higher LVR loans.

Disadvantages of a 95% LVR home loan

Paying LMI

LMI is a significant disadvantage of 95% LVR home loans. It's an additional cost imposed on borrowers who have a deposit of less than 20%. LMI protects the lender, not the borrower, in case of loan default. Since it's often a substantial amount, it increases the overall cost of the loan and can be a financial burden for the borrower. According to our LMI calculator, a 5% deposit on a $750,000 owner-occupied home could mean an LMI premium of $38,760 over a 30-year loan term.

Higher interest rates

With a high LVR loan, borrowers typically face higher interest rates. Lenders view these loans as higher risk because a smaller deposit means less equity and more money borrowed. Consequently, they charge higher interest rates to mitigate this risk. Over the life of the loan, this can amount to a significantly higher cost for the borrower.

Risk of negative equity

Negative equity occurs when the value of a property falls below the outstanding balance on the mortgage. With a 95% LVR, there’s a higher risk of this happening, especially if property prices decline. This situation can be problematic, particularly if the borrower needs to sell the property or refinance the loan.

Fewer loan options

Not all lenders offer 95% LVR home loans due to the higher risk involved, and those that do may have stricter eligibility criteria. This limits the borrower's options and may force them to settle for a loan with less favourable terms or higher costs.

Bigger loan repayments

A smaller deposit means borrowing more money, which leads to larger loan repayments. This can strain the borrower's budget, especially if interest rates rise or their financial situation changes. Larger repayments also mean that a higher portion of the borrower’s income is dedicated to servicing the mortgage, reducing their ability to save or invest in other areas.

How to get approved for a 5% deposit home loan

In order to increase your chances of approved for a 95% LVR loan, you should make sure to do the following:

1. Get hold of a copy of your credit file. This will give you a good sense of how much of a risk lenders are going to see you as. Services like Credit Score Hub in the CommBank app allow you to check your credit score for free.
2. Keep all of your payments up to date on your liabilities. This includes all of your monthly bills such as your mobile phone, car payments, credit cards and electricity bills. Missed bills hurt your credit score.
3. Look at minimising your credit card limits and reduce your personal debts where possible
4. Try to cut your spending and minimise unnecessary expenses in the six months leading up to your application.
5. Have a minimum of 5% of the purchase price of the property in genuine savings. This means your deposit should not be a gift from a family member. This will help you prove your “credit-worthiness” with your lender. It is also going to help you if you really have a savings account apart from your deposit.

Why you might be declined for a 95% LVR home loan

If you’re planning to apply for a 95% loan, it’s important you put forward an impeccable application. There are some common reasons why lenders will decline a loan:

• You have had numerous credit checks performed on your credit file
• You have high credit card debts and other personal loans
• You have had a default registered against your name
• Your time in your present employment is minimal
• You have recently changed jobs and you’re still on probation
• You have recently changed industries

Guarantor Home Loans

Another way to circumvent LMI on a 95% LVR loan is to get someone to act as a guarantor on your loan. This is an extra layer of security for lenders that often means they are happy to waive LMI.

_{Photo by Egor Myznik on Unsplash}