Are Low Deposit Loans Becoming A Thing of the Past? Good question.

The question I am most often asked is how can I borrow the maximum amount of money for a property?

A small number of lenders will lend up to 95% of the property value, that number of lenders has dwindled over the last 12 months due to an increase in regulation. In fact, a 95% loan for investment purposes is just about extinct.

There is an additional cost for people who borrow over 80 % of the property value, known as lender’s mortgage insurance. If you are borrowing 95% of the value of the property, the mortgage insurance cost will be in the vicinity of 2.5% – 4% of the borrowed amount. Some lenders will capitalise this to the loan, which means you effectively borrow up to 99% of the value of the property.

There are pros and cons here. In an upward trending market, it gets you in the property market before the property price escalates again. You may find that paying a mortgage is similar to paying rent and justifies the mortgage insurance costs. This has rung true in recent times with interest rates being so low. Conversely, in a steady or even downward trending market you will have to work hard at paying down the loan as there is no growth to offset the cost and a bigger risk to manage the mortgage.

Borrowing at 95% of the value of the property is a great way for a first-time home buyer to enter the market. For most home buyers, buying their first home is a chance to get out of renting, and they see it as their forever home or one they plan to use to upgrade to something bigger down the track. On the other hand, the property investor’s goal is to build a property portfolio to create financial freedom. Having too many properties that are too highly geared creates way more headaches than freedom. I would strongly recommend that first-time property investors save at least a 10% deposit plus the cost to complete the deal.

Not everyone would agree with me on this. One school of thought advises that you use as much of other people’s money as you can when investing so that you can get into more properties, and accept mortgage insurance as just a cost of doing business. My response is to keep the end goal in mind: you want financial freedom not headaches.

I have met many property investors who get in at the top of a boom with a minimal deposit, only to get caught up in the downdraft when the market corrects. All of a sudden, their property is ‘upside down’ and they owe more to the bank than the property is worth. The minute there is a tenancy vacancy they start to hurt because they are now funding 100% of the mortgage. If the vacancy lasts for several months, they get desperate and want to sell. When desperate they make rash decisions, and may sell well below what they paid for the property just to get rid of the headache. A lot of this can be attributed to a lack of market research, and if you combine it with an extremely high loan to valuation ratio (LVR) such as a 95% loan, you just set yourself up for failure. The difference in this same scenario for the owner-occupied home buyer is that they keep paying the mortgage for the roof over their head, and many ride out the downturn.

The key to borrowing successfully is to check in with your mortgage broker and find out what you can do, and then you can buy with confidence.