Are 106% home loans still available in Australia?
Saving a deposit to buy a home is one of the biggest financial challenges most of us will ever face, especially if you’re saving for your first home. With this in mind, the prospect of a 106% home loan – that is, a mortgage that allows you to borrow 106% of the purchase price of a property – sounds like a pretty attractive deal.
Unfortunately, 106% home loans are no longer available in Australia. However, there are still ways you can access the financing you need to buy a home, even if you don’t have a sizable deposit saved.
How did 106% home loans work?
A 106% home loan was designed to allow you to borrow the full purchase price of the property you wanted to buy, as well as an extra amount for all the additional costs associated with buying a home. These include stamp duty, legal fees, conveyancing costs and lender’s mortgage insurance (LMI).
These types of loans were suited to first-home buyers and other borrowers who didn’t have a substantial deposit saved. However, due to the extremely high loan to valuation ratio (LVR), these home loans tended to attract higher interest rates than ordinary loans.
Scott Beattie, Business Development Manager from Cube Central, explains that 106% home loans were actually quite rare. “There was only one (that I am aware of) and that was Establishment Loan, a division of Devine Homes in Springwood, Queensland,” he says.
“However, some lenders would lend up to 100% LVR and the client would need to cover all of the costs such as LMI, stamp duty etc.”
Michael Russell, managing director of MoneyQuest Finance Specialists, says that prior to the GFC, St.George Bank actually offered a 100% home loan. “Aimed squarely at first home buyers, it allowed them to borrow up to 100% of the purchase price and save only for stamp duty, titles office fees and legal fees. The product was particularly attractive to first homebuyers struggling to save the normal deposit in a red-hot housing market,” he explains.
“Understandably, the product attracted a higher risk rating and in lieu of being internally mortgage insured, it was offered with a risk fee of 1% above the bank’s standard variable home loan rate.”
How could lenders offer such a high LVR?
Michael Russell outlines three simple reasons why lenders could afford to offer loans with such high LVRs:
- They had an abundance of money to lend;
- They were able to obtain LMI; and
- They priced for risk by offering the loans with higher interest rates
Scott Beattie says that 106% loans were very strict with policy and applicants had to satisfy a range of criteria in order to qualify for a loan. “We had to supply six months’ bank statements for each and every bank account that they had and the lender went through and scrutinised every transaction,” he says.
“These loans were designed for very strong ‘credit worthy’ applicants, so not for people just scraping by. Two examples of loans that I can recall:
- A solicitor with great income, but no savings habit (i.e. he spent most of his pay) but a mortgage was almost the same as the rent he was paying. He had capacity to repay and was a strong applicant, but he had just been living a ‘good life’ and wanted to now enter the property market rather than wait until he had saved 5%+ deposit.
- The other was a lady on good income with good employment history, but she was renting and had a personal loan and no savings. In this case, we lent 105%, cleared her personal loan with the First Home Owners Grant and got her into a property with less repayments (i.e. no rent and personal loan).”
What happened to 106% home loans?
Australian lenders have imposed tighter restrictions on their lending practices in recent years. Following the huge financial fallout of the GFC, 106% home loans (and a range of other no-deposit home loan options) were withdrawn from the Australian mortgage industry. Borrowing more than the purchase price of a property commonly placed borrowers under significant financial stress, resulting in an increased risk of mortgage defaults.
Russell says that St.George’s 100% home loan was phased out in the aftermath of the GFC for a few key reasons:
“1. Costs of funding escalated and as a consequence the banks began credit rationing;
“2. Lending institutions were lifting their credit standards and unfortunately the 100% home loan stood out like the proverbial; and
“3. The natural enemy of the 100% Home Loan – a retraction in housing price growth – was occurring and this was enough for the product to be quickly withdrawn.”
Beattie says that the 106% home loan was phased out very quickly post-GFC – “my understanding is that was they couldn’t secure funding for that LVR anymore,” he says.
“Personally, I don’t believe that these loans were risky for the right applicant, given the stringent application and assessment criteria. I think a lot of people believe that they were just given out to anyone and it certainly wasn’t the case from my experience. The main risk was really only of the property value dropped and the client went into foreclosure, then there may have been a shortfall,” Beattie says.
What other options are available?
Although 106% home loans are no longer offered in Australia, there are still options available to help you borrow more than the purchase price of a property. The most accessible of these options for many people is a guarantor home loan. These loans can be taken out when someone else, for example, your parents or another close relative, assumes the responsibility of paying off your loan if you are unable to keep up with repayments.
“Where loan serviceability is not a problem but the capacity to save for the deposit and other settlement costs is, a parental guarantee may provide the perfect solution,” Russell explains. “This involves a parent providing a security guarantee to allow a lender to lend as much as 109% of the purchase price — thereby eliminating or significantly reducing the size of the deposit needed. When a parental guarantee is provided, the lender’s overall loan to valuation ratio will not exceed 80% and thereby there is no need to pay mortgage insurance. Typically, the parents’ home is used as the security property to support their parental guarantee.”
As well as a guarantor loan, there are other options available for borrowers with little or no savings. For example, you could be lucky enough to have your parents or other relatives gift you the deposit for a home loan, or you may be able to use the equity you have in another property to finance a new loan.
But even if you don’t have a large deposit saved, it could still be possible to access the financing you need to buy a home. “The most we can lend now is 95% + LMI on a completed property with no need for ‘genuine’ savings, i.e. as long as the client has the 5% deposit + costs (and it can be the First Home Owners Grant in most cases),” Beattie says.
Speak to your mortgage broker to find out more about the borrowing options at your disposal.