106% home loans: what are they?
No deposit home loans are becoming increasingly popular for a fairly obvious reason: buyers who apply for this type of loan do not have to save a deposit to purchase property. Each lender will have their own variations of this type of loan, but the two most common forms are the 100% and 106% loans.
The better known 100% home loan means you can borrow the full cost of your property, so why would you need to borrow 106% and what is the extra 6% for?
The 106% no deposit home loan explained
The difference between 100% and 106% home loans is that with 100% loans you are only borrowing the amount required to purchase the property. The 106% home loan allows the buyer to borrow the full property amount as well as most of the associated costs such as legal fees, stamp duty and mortgage insurance.
The maximum amount you can borrow usually depends on the state in which you are purchasing property. New South Wales has a higher maximum due to property costs being higher, followed by Victoria and then Queensland. The minimum amount you can borrow usually ranges between $150,000 and $200,000 depending on your lender’s policy.
This type of loan is generally suited to first home buyers with little or no savings and buyers who are purchasing an investment property and want maximum negative gearing benefits.
Excluding the no deposit advantage of the 106% loan, the only other “pro” worth mentioning is that if you’re a first home buyer most lenders will let you keep your $7000 government grant to spend as you wish.
Disadvantages of 106% home loans
There are various “cons” associated with no deposit loans that potential borrowers should take into consideration:
- If you take out a 106% home loan you will be paying it back with a much higher interest rate than you would be with a standard home loan
- You may be required to pay extra mortgage insurance
- The approval process is known to be difficult and you may not be able to borrow if you are not paid a high enough income. Self-employed borrowers may also have trouble getting their loan approved.
- Not all postcodes/areas will be approved. This is dependent on your lender
- There are property type restrictions. Generally, houses, townhouses and units are accepted. However, depending on your lender, you may not be able to purchase land only, serviced or high rise/inner city apartments or properties with a poor building report.