Nov 2000 Volume 81 Number 11 "serving the protectors"
Wanting to build a new home? IF AN OFFER LOOKS TOO GOOD TO BE TRUE... THEN IT JUST MIGHT BE!

Have you seen offers such as “We can lend you 100% of the price of a new home” or “We pay all your legal costs and your deposit”. Seems too good to be true, doesn’t it?

Well, often there’s a catch

Let’s look at the normal finance situation of a home purchase:

When you borrow money to buy a property, financial institutions can only normally lend up to 95% of the value (not the purchase price) of the property. You need to have genuinely saved 5% as a deposit. This is because the financial institution needs to have the loan protected against loss by insurance (Lenders Mortgage Insurance). The insurers will only offer protection if they feel the borrower is committed to the home and that there is a small buffer of equity should the home need to be sold before capital values have increased. The 5% deposit is their guarantee and buffer.

There is a lot of legal and other associated costs to purchase or build a home, which can be $000s. Rule 1 still applies - you can only borrow 95% of the value of the property, and legal costs do not add value to the property.

The good news at the moment for first-time buyers is that the First Home Owners Grant can be used to cover your legal costs - and what’s left over can be used at your discretion.

How can these unreal offers be made?

Well, it appears that, in some cases, a builder can add all of the additional costs to the price of the house and organize finance through a lender who prices the interest rate to match the risk of not having Lenders Mortgage Insurance.

This option does allow you to purchase the property, but as you are borrowing more than the value, if you wanted to move later, you may find that you wouldn’t be able to sell your property at a price that would clear your mortgage. This may prevent you from selling the property, or it may mean that you could sell, but would still have a large debt to repay to the lender.

This option can also mean that you don’t benefit from the usual lower interest rates which are normally offered for mortgage-secured loans. If the lender is covering their higher risk, your interest rate could be quite a bit higher than normal.

So, there are options out there, and they may be good for you, but just be careful and make sure you understand the consequences. Having all the details will allow you to make an informed decision.

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