Is it worth going to 95% if can find good property?

Hi all,

I was just wondering:
a) is it worth going to 95% if I'm able to find good property? I know I'll have to pay high LMI and interest rate.
b) How will having one (or some) loans at 95% impact my future borrowing?

A lender I'm discussing with has the option to go to 95%. I currently have IP 3 loans at 90%. My thinking is that if I'm able to find good quality property then it's worth getting into the market and paying the high LMI and interest rate rather than sitting on the sidelines, but interested to see what others think.

Cheers,

Ben

 

Possibly, but what's the plan for the property?

It'll be a very long time til you can access equity since top LVRs aren't 95.

 

It's intended to be a buy and hold property. How come I wouldn't be able to access equity?

 

Cause most will be 80LVR for release, either way you have to wait till there is equity built up before you can re borrow against it.

 

For an equity release, most lenders have significant limitations above 80% and virtually no options above 90%. By lending to 95% on an IP you're spending a lot of extra money on mortgage insurance, which is that little bit extra that the property needs to increase in value before you can release any equity.

With all the lending restrictions that are going to be coming in the next few weeks, serious investors are going to be best served by starting as close to 80% LVR as they can.

90% LVR is a reasonable place to start, but it's getting very difficult to justify 95% for investment lending in my mind.

 

I agree, I think 95 may be ok for PPOR and first home buyers (probably more the latter), 90 ok for some good investments possibly, and 80 is a more sane, normal level for average investors.

At 80 you miss the LMI fees and the LMI calcs !

 

Worth it? Do you know the cost? What is the difference in deposit paid going to mean for you? Will it mean you can buy a big screen telly finally? Have a bigger buffer to manage risk? Buy a property you think has better capital gain prospects? Higher rent?

I've always purchased at 95% except the last time when I did 60%, but that was the maximum lvr allowed at the time. Everyone's different. 'Worth' is relative.

 

@Peter_Tersteeg what lending restrictions are going to be coming in the next few weeks?

 

If I was in your position I would continue to sit on the sidelines and use the money you were going to spend on deposits/mortgage insurance and make improvements to your current stock to further increase your existing equity.

 

APRA has been making noises about certain lending practices which lead to generous servicing policies for investors with with multiple loans. The most generous (by quite a bit) mainstream lender is currently the NAB. The NAB have been confirmed to be changing their servicing policies in the near future which will severely limit the amount they'll lend to investors.

It wouldn't surprise me if other lenders then follow over the next few months as APRA turns their attention to those lenders.

There are quite a few lenders that operate outside of APRA oversight, but the mortgage insurers are also adjusting policies that don't favour investors. This means that it will be significant restrictions on how much you can borrow if the loan is mortgage insured.

This doesn't just apply to new purchases, but also to refinances, equity releases and interest only extensions. An investor on an average income will be able to purchase perhaps one or two IPs borrowing more than 80%, but beyond that every loan they take will need be be 80% or lower.

 

I was thinking that if I got LVRs at 95% rather than 90% then it would allow me to buy more properties or higher value properties, but not sure if it is worth it or not. I understand LMI and interest rate increases substantially after 90%.

 

The amount of LMI is a non linear percentage of the loan amount. Roughly speaking at 85% LVR it's about 1% of the loan amount. At 90% it's about 2% of the loan and at 95% it's about 4% of the loan.

What this means is when borrowing to 95% instead of 90%, for each extra dollar you borrow, you give as much as half of it back in extra LMI premiums.

Borrowing 95% instead of 90% doesn't leave much extra cash in your pocket at all.

 

My question to you... how about 100%? how about 110% - you get paid 10% for owning the property... (with the loan) does that make you excited?

 

For me, IP2 and IP3 were 105% purchases. In this lending environment I would not do that again. My next will be under 80% LVR.

 

Yeah, my last purchase (Feb this year) was 105%. I think it will keep me out of the market for a while.

Our next property transaction will probably be the sale of our PPOR.

 

Between the time taken to save up the 20℅ property price may rise and taking >100℅ with a mortgage why not to reap the rewards of property price rise? Even if you have extra funds, you can take up the loan and have the funds sit in the offset account to offset the interest cost.

 

I don't have an issue with this so long as the property and plan stacks up.

Saving the extra cash could take a long time! If however you were handy then I see no reason why you wouldn't highly leverage to get into the market, deploy a solid renovation strategy and easily claw back your LMI. Purchase well in a good capital growth area, combine the two and it's a simple equation for mine.

A speculative play however with no plan to manufacture any growth then stick to the sidelines.

 

@albanga's posts on this thread sounds logical and sensible to me

 

I've done only a small handful of 95% lends.

In most cases, the only times it makes sense:

• Preserve cash (for more IPs, a reno, buffer etc).
• Not planning to add value to that property or refinance for some time.
• On low loan amounts (LMI scales both on LVR AND loan size - it's disproportionally higher the bigger the total loan)

 

This is exactly what I had in mind when I asked about going 95% for the first IP just yesterday. Looking around the $450k mark so according to Genworth, it works out at an extra $8k over going 90%. As it's tax deductible and capitalized over the next 5 years, it's really not too bad considering it will save me about another 1.5years of having to save! A well researched buy in and decent but cheap reno should be able to get it back to 90%.

Id rather be getting in now and pay that extra money than find out in a years time that APRA have enforced significant restrictions on investor lending making it a lot harder even with 90%.