Warning to first home buyers: Beware of appealing home loans

Financial institutions have regained confidence in borrowers, with lenders offering loans with very high loan-to-value ratios (LVR) for the first time since the global financial crisis.

Following a pilot test this year, Mortgage House is one of the first to offer a home loan with a 105 percent LVR to commence in October. What this means is that borrowers can receive 105 percent of the value of the property. For instance, if you were to purchase a $300,000 property, you could essentially borrow $315,000.

As well as this loan, Mortgage House also has a 99 percent LVR mortgage that they launched in August. Westpac has also raised its LVR for new customers on some of its home loans by 5 percent to 92 percent.

High LVR loans are on the rise

The number of loans available with higher LVRs are not yet where they were before the global financial crisis hit our shores. For instance, in mid-2008 RateCity recorded more than 600 mortgages that offered up to 100 percent LVR. That’s about a quarter of all mortgages monitored by RateCity.

However, the last time RateCity recorded a home loan with a 100 percent LVR was in September 2009, which shows that very high LVR mortgages could be making a comeback to the market.

What this means for borrowers in the market for a home loan is that they can now borrow more for less, meaning that they will not require to save as much of a deposit or in some instances no deposit at all.

Borrowers beware

Mortgage House CEO Ken Sayer told the Sunday Telegraph that very high LVR loans may not suit everyone. “Unless the borrowers have a good credit record – and the properties are readily saleable –  we’ll be much more conservative,” he said.

While they may seem attractive initially, borrowers considering to apply for a mortgage with a very high LVR need to be aware that there could be risks involved.

Loans with higher LVRs are often seen as a higher risk to lenders, so the interest rates for these types of loans are usually higher than loans with lower LVRs. This is because deposits are seen as a form of security against the loan, so the more you pay as a deposit, the more secure the loan.

Also borrowers need to be aware that if the price of their property decreases and for whatever reason you have to sell, if you still owe the bank money you could be in more debt and at great risk of negative equity.

So before you take the leap with a high LVR loan, make sure you do your research and compare home loans online as you may be able to find yourself a better deal.

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