Money

Looser lending has downsides

Paul Clitheroe.
Paul Clitheroe.

BANKS are relaxing their lending limits, and while it's a move that may be welcomed by first home buyers, I'm not convinced that being able to borrow more is always a good thing.

Research by comparison site Rate City shows that around 70% of today's home loans require a deposit of just 5%. Put differently, it means that with savings of just $25,000 you could potentially buy a home worth $500,000.

Two years ago, when we were still reeling from the global financial crisis (GFC), only around one in two banks offered loan limits this generous.

Indeed prior to the GFC, 'no deposit' loans were very popular. In some cases borrowers could borrow up to 105% of their property's value with the option to tack buying costs like stamp duty onto the loan. These loans have since gone the way of the dinosaur, and I don't expect to see them return any time soon.

Today's increasingly generous lending limits may sound promising for first home buyers with a small deposit, however borrowing a bigger proportion of your home's value comes with a raft of downsides.

Foremost among the pitfalls is the prospect of paying lenders mortgage insurance (LMI).  This protects the lender, not you, in the event that you cannot meet your loan repayments, and it is something most lenders will insist on if you borrow 80% or more of your home's value. For the home buyer, it is nothing more than another cost to contend with for getting your own roof over your head.

The thing is, LMI can cost far more than many people realise. As a guide, if you have a deposit of $20,000 and you want to borrow $380,000 to purchase a $400,000 home (in other words you have a 5% deposit) the LMI premium could come to around $11,500. That's over half the value of your deposit! In fact, using this example, you would need a deposit of at least $81,000 to avoid LMI altogether.

Another example - LMI on a $570,000 loan for a $600,000 property is nearly $24,000. That's very serious money!
Some lenders will let you add the LMI premium onto your loan (known as 'capitalising' the cost). This means you are paying interest on the premium, which inflates the expense even further.

If you are interested in knowing what you could be up for in lenders mortgage insurance, search it online and you will find a few calculators.

There are other downsides associated with borrowing a high proportion of your home's value. It means taking on a bigger loan, and that means paying more in monthly repayments - and overall interest charges. It also means you are at greater risk of struggling with your loan if your work hours are cut back, an unexpected expense crops up, or you or your partner face unemployment. I don't want to sound like a doomsayer, especially as I am a fan of home ownership, but you need to consider these possibilities and have a plan for meeting your mortgage repayments if and when they occur.

Remember too, saving a more substantial deposit will leave you better placed to comfortably pay off your home - especially if, or rather when, interest rates rise.

Today's property market may be showing signs of a modest recovery though it remains a buyer's market in many parts of the country. This means many buyers have no compelling excuse to rush into the market - and plenty of sensible reasons to focus on growing a decent deposit.

Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money magazine. Visit www.paulsmoney.com.au for more information.

Topics:  banks interest rates lending


Stay Connected

Update your news preferences and get the latest news delivered to your inbox.

Former marine biologist weighs in on pink water

Pink water and a strong smell was discovered at Airlie beach lagoon inlet this morning

A strong smell was in the air at the Airlie lagoon this morning.

Domino's hits ground running

TEAM DOMINOS: Deepala Sha, Nicole Reville, Manjula Ravi, Lily Muir, Gabby Harper, Dean Bobak, Latif Abul, Tim Stilwel and Raymond Black of the Airlie Beach Dominoes store.

One year on and Domino's is on track

Thundakats to hear it first

READY TO ROCK: Thundamentals will surprise fans with new music when they hit the stage at Magnums Hotel on Saturday night.

Thundamentals will hit Magnums tomorrow night

Local Partners

An 'Aussie twist' on the great Christmas classic

The Whitsundays College of English presented their play 'An Aussie night Before Christmas' on Thursday to kids at Cannonvale Library.

Kernaghan's a 'boy from the bush' with a timeless quality

Country music singer Lee Kernaghan.

Lee Kernaghan is celebrating the 25th year of his breakthrough song.

Man builds playground entirely out of packing tape

Artist Eric Lennartson is in the process of completing his huge tape sculpture at the Ipswich Art Gallery.

VIDEO:And here's where you can play on it.

Countdown to Woodford Folk Festival begins

ECONOMIC BOON: Woodford Folk Festival is celebrating its 30th anniversary this year.  Photo Contributed

The first larger-than-life inhabitants have stepped into Woodfordia

EXCLUSIVE: Meet Robert Irwin, wildlife photographer

SNAPPER: Apart from wildlife, photography is Robert Irwin's great passion.

Steve's boy has a passion for photography

Louis Tomlinson's tribute to late mother

Louis Tomlinson's new single is a tribute to his late mother.

Justin Timberlake stuns students with secret class

Justin Timberlake stunned high school students in Sydney

Carrie Fisher says Ford will be bugged by affair confession

Carrie Fisher is sure Harrison Ford is annoyed at her

Dakota Fanning rekindles romance with childhood sweetheart

Dakota Fanning rekindles romance with ex

Jennifer Lawrence apologises to the people of Hawaii

Jennifer Lawrence sorry for 'offensive' story

Essential to get new Maroochydore CBD fundamentals right

LOOKING AHEAD: The central business district at Maroochydore is planned to be the heart of the Sunshine Coast.

SunCentral reports good progress on 53ha Sunshine Coast city heart

'Crucial' farm land eyed by defence department

Lawson Geddes moving the Brangus cattle to higher ground - which is the land the Defence Department is interested taking for the Shoalwater Bay expansion.

"You can't have one without the other.”

Former Shark Show for sale for $1.3 million

Vic Hislop at the old Shark Show.

TALK about a jaws-dropping real estate opportunity.

There's a whole lot of luxury in this home

The Endeavour Foundation's latest prize home in Mountain Creek.

WHEN it comes to desirable homes, it's hard to go past a prize home.

Ipswich City Properties asset portfolio retains its value

Ipswich City Council Administration Building, South Street, Ipswich. Photo: Claudia Baxter / The Queensland Times

New website launched by Ipswich City Council

Ready to SELL your property?

Post Your Ad Here!