Is a 100% home loan a good thing for you?
There are a number of things to consider before you take out a 100% or 105% home loan. Borrowing 100% or 105% of the homes value can be a great way to get in your first home. But there is a downside, generally the interest rate is considerably higher than what it would be if you had a larger deposit. Here we look at 100% and 105% home loans and how they can benefit you and also some of the pitfalls of taking out such a loan.
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What is a 100% home loan
Loan valuation ratio (LVR) is calculated by dividing a loan amount by the property's value. For example if you have a $800000 home loan and your home is worth $1000000 then you loan valuation ratio is 80 percent. So, with a 100% home loan you are borrowing 100% of the home loans value, meaning you need no deposit. Generally loans with a higher LVR command a higher interest rate.
Lending organisations encouraging debt
Many lending organisation may be very willing to provide you with the funds to get you into your home by lending you 100% or 105% of the total value of the home. Lenders today are often criticised for lending excessive amounts in the fear that home buyers cannot sustain such high debt levels. Should interest rates rise, home buyers with significant levels of debt could face the prospect of the bank foreclosing on their house. Each lending institution has its own criteria for approving debt levels, depending on which lending institution you apply for you may find you are approved or disapproved for a 100% home loan.