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.

Tourists love sea-side

WHAT A LIFE: Stem 2 Stern representative Matthew Flint enjoys a delicious lunch with a view at Sorrento Restaurant.

Sorrento is the perfect venue to celebrate a milestone.

Stinger invasion closes Whitsunday beaches

A member of the Whitsunday Coast Lifesaving Club with the box jellyfish caught at Boat Haven Beach yesterday.

Stinger invasion closes Whitsunday beaches

Airlie experience helps hone skills

TESTING: Sydney medical students Eleanor Hall and Destiny O'Dea.

Airlie experience helps hone skills.

Local Partners

Taking on a personal touch

FORGING an intimate relationship with local people is what live music tours are all about.

How Stay at Home Mum blogger Jody Allen struck it big

Jody Allen and Walt Collins will co-host the Seven Network's Stay at Home Mum television series from April.

Jody Allen's star continues to rise at incredible speed

Comedy with extra cheese

Paul Fenech is taking his TV series Fat Pizza on the road for a series of live shows.

Fat Pizza and Housos are coming to town

One of the top five car collections in the world

A 1950 Alvis TB14 Roadster is a highlight in the museum.

Gosford home to largest, privately-owned classic car collection.

Tensions high at pointy end of MKR's round two

WHEN an ex-vegan pacifist says "I think people that score strategically need a kick in the shins”, the MKR gloves are off.

Jungle Jay sent packing from I'm a Celebrity

I'm A Celebrity ... Get Me Out Here! contestant Jay Laga'aia with Keira.

BIG friendly giant Jay Laga'aia has been eliminated from I'm A Celeb

Carson Kressley brings 'camp' to I'm a Celebrity jungle

"I am not all Park Avenue and daffodils” ... Carson Kressley.

Meet the "campest” campmate to star on I'm a Celebrity.

Taking on a personal touch

PERSONAL: Emily Krause is taking her tour to Magnums Airlie Beach in March.

Emily Dawn will hit up Magnums next month

No better place to plan for knot tying

GET PLANNING: The Whitsunday Wedding and Honeymoon Expo is fast approaching.

Check out the wedding and honeymoon expo next weekend

Star Wars: The Last Jedi mystery already solved

FILE- This undated file photo provided by Disney shows Daisey Ridley as Rey, left, and John Boyega as Finn, in a scene from the film, \"Star Wars: The Force Awakens.\" Hasbro said it is changing its Star Wars Monopoly set after an 8-year-old girl became upset that Rey, the movie's female heroine, was not included as a figure along with Darth Vader and Kylo Ren. (Disney/Lucasfilm via AP, File) MANDATORY CREDIT

A key mystery surrounding the title of episode eight has been solved

Kids' game "full of f**king paedophiles" according to dad

A mortified dad has expressed serious concerns over an online game

What $11.9m can get you on Coast's most exclusive street

29-31 Wyuna Drive Noosaville Qld 4566

This is what a cool $11.9m can get you

How a first home buyer built house with no deposit

NEARLY THERE: Construction on the first house to home orphans at Umoja began in January.



Photo Contributed

His home will be completed later this year.

$6.3 billion project to drive population boom

BIG IDEAS: Artist's impression of the new 10,000-unit complex to be constructed at Springfield Central.

Driverless trains could take thousands to and fro from Springfield

Company collapse: Boss goes to Vegas, staff lose thousands

Last chance for staff to lodge their claims

Mining giant execs could sun themselves on region's island

OFFERS INVITED: Potential buyers are showing interest in Camp Island, off the coast of Bowen.

The vendors are hoping for at least $2m for the island.

Ready to SELL your property?

Post Your Ad Here!