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95% LVR - too much?

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| 08 Aug 2012, 01:59 AM Agree 0
I have heard of some people who are buying their properties with as little as a 5% deposit. It seems great to be able to do this if your credit stacks up, but I would feel a little uncomfortable with the idea. Aren't there lots of ways it could come back to bite you in the arse?

I'd like to know if anyone could recommend doing it?
  • Eos Property | 09 Aug 2012, 04:33 AM Agree 0
    Hi Brian,

    Very much a horses for courses type response along with an 'it depends' clause.

    The advantage of 95% lends is that your cash savings or equity used reduces significantly.

    For example if you are buying a $400K property many people typically use an 80% loan as follows:

    80% Loan = $320K
    20% Deposit = $80K
    5% Purchasing Costs = $20K

    Savings/Equity required = $100K

    90% Loan = $360K
    10% Deposit = $40K
    5% Purchasing Costs = $20K
    2% LMI (Notional Figure Only) = $7K

    Savings/Equity Required = $67K

    95% Loan = $380K
    5% Deposit = $20K
    5% Purchasing Costs = $20K
    3% LMI (Notional Figure Only) = $11.5K

    Savings/Equity Required = $51.5K

    Increased LVRs do speed up the investment process as lower savings/equity levels are required.

    The flip side of the debate is that any reduction in property values do expose individuals to increased risk of owning a property with more debt than it is worth. This is something individuals should consider before embarking on such a decision. I might add we have always paid LMI with our investments.

    I don't have a problem with LMI and high LVRs on individual properties but I would be very reluctant to have a high LVR across the whole portfolio. Too much can go wrong.
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