Generally speaking, lenders calculate Loan-to-Valuation Ratios (LVRs) on the lesser of the purchase price or the valuation of a property being used to secure a mortgage. And if your LVR exceeds 80%, you need to pay the mortgage insurance premium on the bank’s behalf.
In the past, it didn’t matter if you had purchased a property off-the-plan one or two years earlier and it was worth considerably more now, but that’s changed according to Principal of Scout Finance, Geoff Schippers.
“We’re seeing an increasing number of lenders relaxing the conditions around off-the-plan purchases and revisiting the true LVR when the property is completed – not simply relying on the price it was purchased at some time before” said Mr Schippers. “Where in the past you might have to pay around $14,000 in mortgage insurance to borrow 90% on a purchase price of $600,000, it’s possible now that you could avoid mortgage insurance altogether.”
“Imagine you purchased the property off-the-plan 12 months before it’s due to settle. Assuming you still need to borrow $540,000 on completion, if it’s market value has risen to $675,000, your new LVR would be 80% and therefore the loan would not require mortgage insurance.”
Whilst this might represent a best-case scenario, Geoff says there are two other factors which may help you avoid mortgage insurance if the valuation doesn’t quite come in high enough to keep the LVR to 80%:-
- Savings – buying a property off-the-plan gives you added time to build more of a deposit up. If you budget well initially and are disciplined enough to stick to it you may be able to reduce the loan amount you need to borrow on completion
- The Mortgage Insurance Premium – it’s not inconceivable that the money you had earmarked to pay mortgage insurance may be enough to reduce the required loan to 80% if the valuation has increased (and you’ve saved more deposit) since you purchased the property off-the-plan.
“Remember, though, that not all lenders will lend against the value of the property once it’s complete so it’s important to explore your lending options first. Know where you stand before you jump in because you won’t have a lot of time to get reorganised later once the property is complete.”
If you would like to discuss financing an off-the-plan purchase, contact Geoff Schippers at Scout Finance today on 0420 905 608.
Geoff Schippers of Scout Finance has been a mortgage broker since 1998 and has settled more than 3,000 loans worth in excess of $750,000,000. He has previously been Mortgage Choice Australia's No. 1 mortgage broker and now runs his own boutique brokerage offering the same exceptional service and unparalleled expertise for mortgages (residential and commercial), strata finance and asset finance. For enquiries, call Scout Finance today on 02 9526 7899 or visit www.scoutfinance.com.au.