What are 95% LVR home loans?
A 95% LVR home loan is one where the loan-to-value ratio (LVR) is 95%. That is, the buyer will put down a 5% deposit and borrow 95% of the price of the home.
Higher LVR home loans are generally considered to present a higher risk to lenders. As a result, borrowers may find the application process is stricter and that fewer lenders are willing to over 95% LVR home loans.
However, a 5% deposit is still commonly accepted by lenders, and home buyers with smaller deposits may have additional tools at their disposal to improve their mortgage chances or secure a more competitive interest rate.
Do you need to pay Lenders Mortgage Insurance (LMI) with a 95% LVR?
Yes, you will most likely need to pay Lenders Mortgage Insurance (LMI) if you have a 95% LVR. Generally, the deposit threshold to avoid LMI is 20%. That's generally because if a buyer defaults on their high LVR loan and the lender needs to sell the property to get its money back, it has less of a buffer against losses.
LMI protects the lender against possible losses, but the cost of any LMI policy falls on the buyer’s shoulders.
LMI can easily exceed thousands, if not tens of thousands of dollars. If you choose to roll the cost of LMI into your mortgage, you may have to pay interest on that amount too.
How to avoid LMI if you have a 95% LVR
There are a handful of schemes that may help you avoid LMI, even if you have an LVR of 95%.
- 5% Deposit Scheme: The Australian Government’s 5% Deposit Scheme may help you avoid LMI completely. To access it you must be a first home buyer or single parent, borrow from an approved lender, and satisfy other criteria.
- ‘Help to Buy’ scheme: Eligible homebuyers with a deposit of at least 2% may receive a government contribution to help buy their home, with the government then holding equity in the property purchased.
- Guarantor home loan: If a family member or friend is willing to be a guarantor on your home loan, you may be able to avoid paying LMI.
- LMI waivers: Some banks, like Westpac, ANZ, and NAB may offer LMI waivers, provided you work in a specific industry or profession and hit a minimum income threshold.
How to compare 95% LVR home loans
Contrary to popular belief, many lenders offer mortgages to borrowers applying with a 95% LVR. But a higher LVR will generally attract higher interest rates.
The table at the top of this page can help you compare rates on home loans available to borrowers with LVRs of up to 95% from our panel of providers.
What to know about 95% LVR home loans
A 95% LVR home loan is generally considered riskier
A 95% LVR is considered riskier than most loans, because the lender could lose out on a larger sum of money if you fail to make your repayments.
Borrowing with a higher LVR can also put you at greater risk of negative equity. Meaning, you could end up owing more to your lender than your property is worth.
Look at comparison rates
Don’t look at a loan product’s interest rate in isolation. Be wary that there may be hidden establishment, running, or annual fees.
Compare the ‘comparison rates’ on each home loan product, which conveniently account for your repayments and any applicable fees, reflecting a truer cost of your mortgage.
What should I consider when comparing 95% LVR home loans?
While there’s no denying a competitive interest rate is important, there are other factors to consider before committing to any one loan product:
How long do I want to spend repaying my home loan?
- A longer loan term may mean lower regular repayments, but more interest accrued over the life of the loan.
- A shorter term can lessen overall interest costs, but each repayment will be higher.
Do I plan to make extra repayments?
If you plan to pay more towards your mortgage each week, fortnight, or month, or make lump sum repayments, a home loan with a redraw facility can let you access that extra money if you need to.
Keep in mind that:
- Some lenders may impose minimum redraw amounts or daily redraw limits.
- Limits on extra repayments generally apply during a fixed rate period. Exceeding those limits could see you incur hefty break costs.
Would I like the option to reduce interest costs using my cash savings?
Some home loans provide offset accounts. Money kept in an offset account works to 'offset' your home loan’s principal balance for interest calculation purposes, reducing the funds that interest accrues on.
Would I prefer repayment certainty or flexibility?
Variable rates can rise or fall, often depending on the Reserve Bank of Australia's (RBA) cash rate, while fixed rates will remain locked in for an agreed-upon set period of time.
The downside to fixed-rate home loans is the costly break fees you may incur if you sell or refinance your home during the fixed-rate period.
Do I need extra flexibility from my home loan lender?
Some lenders let you modify your existing mortgage without having to refinance:
- Top-ups let you borrow extra money against your equity without having to submit a brand new application.
- Portability can let you migrate your existing loan to a new home if you decide to move.
But, because of the high-risk nature of a 95% LVR home loan, lenders may either impose stricter restrictions on these features or not offer them at all.
Is a 95% LVR home loan worth it?
Whether or not a 95% LVR home loan is worth it will depend on your financial goals and personal finances.
Here are common pros and cons to consider:
95% LVR home loan pros
- Buying a property sooner: A 5% deposit is likely much easier to save than a 20% deposit, potentially allowing you to enter the property market years earlier.
- Loan repayments may be lower than rent: While not always the case, your repayments could cost less than what you’re paying in rent (keep in mind that rent costs are fixed throughout the life of the lease, but the value of repayments can rise and fall).
- Building up equity: Every repayment you make goes to building your equity in your home, potentially strengthening your financial position. In the future, you may be able to borrow against that equity (maybe to renovate your home or buy an investment property).
95% LVR home loan cons
- Considered very high risk: 95% home loans are higher risk than loans taken out with a larger upfront deposit. Applicants may face stricter conditions and higher interest rates to account for that heightened risk.
- Limited lenders: Not all lenders are comfortable with assuming that level of risk. Consequently, the pool of lenders available to you may be narrower.
- Extra fees: Because you’re putting down a 5% deposit, you could be subject to LMI, leaving you thousands or tens of thousands out of pocket. If you intend to roll your LMI into your mortgage rather than paying it upfront, you’ll also have to pay interest on it across the life of your loan.
- Increased risk of negative equity: A 5% deposit can expose you to the risk of negative equity. Negative equity is when you owe more on your home loan than your home’s current worth. If you had no choice but to sell during a market downturn, the sum earned from selling your home may not cover the remainder of your loan, leaving you without a home and with outstanding debt.
