AS SEEN IN THE DINGLEY DOSSIER
New banking rules continue to be imposed on us all! In the July I wrote of rapid bank changes happening and in the two months since then the pace of change has increased, and has gained front page coverage. The majority of existing investment loans have had their interest rates increased in August, this should be prompting you to review your lending if you have not recently done so.
To re-iterate my July warning: All prospective purchasers who had their position checked more than 3 months ago as to borrowing capacity should check again – the rules have changed! Clients new and old considering buying or borrowing to renovate need a health check. Please call us before committing to confirm what you can do.
Continuing on the education series, this month we will cover "How much deposit is required?"
The first thing to understand is that there are no 100% loans (with one exception, read on to the end). Typically we can obtain finance for you to borrow 95% of property valuation where purchasing for owner occupy use: You need to be able to cover purchase costs, plus 5% of the purchase price of the property.
Banks are comfortable lending 80% of property bank valuation. Over that is perceived as carrying increased risk, and Loan Mortgage Insurance (LMI) may apply (note in some circumstances we can obtain loans at 85% or even 90% without this fee applying, however that is the exception rather than the rule). LMI is a one off cost, applicable at the time of settlement, which covers the lender from suffering loss in the event of default. LMI does not insure you, however it does enable you purchase a property you would otherwise be unable to buy. The less you need to borrow, the lower LMI will be, costs vary, but can be as much as 3% of loan amount.
Remember the less risk you appear to present to the bank the better deal they will give you. More savings is better, you should target saving at least 5% of the property purchase price in an account in your name, banks consider this ‘Genuine Savings’, and in many cases it is a minimum requirement.
If you only need a 90% loan from the bank you will save substantial LMI, and be more likely to receive a better interest rate. The optimum position is to require only 80% loan.
Deposit required is a major impediment to first home buyers, however note that family guarantee can be a solution to this. For example if Mum and Dad have owned their home 10 years they may have substantial equity in it, which the bank may then be prepared to use as additional security, enabling the purchaser to borrow more, at a better rate, with less costs (yes even 100% of purchase property plus costs).