The Reserve Bank’s decision to cap high loan to value ratios at 10 percent of new bank lending means that first home buyers in particular will have to start looking at alternative funding arrangements if they are unable to personally meet the requirement that the bank’s loan be no more than 80% of the value being secured. In other words, without alternative funding arrangements, a 20% deposit is required to obtain a bank loan to purchase a property.
It should be noted that these restrictions do not apply to non-bank lenders. However, there are some downsides to proceeding with a non-bank lender. Interest rates are generally higher and terms less favourable toward borrowers. There are generally increased lender costs and lender’s solicitor’s fees whilst with a bank lender the conveyancing solicitor is instructed to act for the bank as well as the borrower.
Multiple loans. For example, further loans from a non-bank lender or a parent lending to their son or daughter so that the bank’s loan to value ratio does not go above 80%.
Additional borrowers. For example, a parent obtaining a mortgage from the bank themselves to offset their son or daughter’s borrowings thereby lowering the loan to value ratio to a level the bank will accept.
Additional security. For example, a parent personally guaranteeing their son or daughter’s borrowings, and thereby putting their own mortgaged property up as additional security.
These alternative funding arrangements can make a simple house purchase all the more complex and daunting. It is essential that you obtain proper legal advice and carefully consider the effects of such arrangements both before you sign your purchase agreement, and during the purchase process.