Nothing To It
The Age
Wednesday July 30, 2003
Christine Long looks at a new home loan that requires a miniscule deposit.
What it is The St George No-Deposit Home Loan.
How it works This home loan is aimed at people with good incomes but very little in savings. It enables them to borrow almost 100 per cent of the purchase price of a house, or its valuation, whichever is lower.
It is available to residential owner-occupied or investment properties, but it is primarily directed at first-home buyers who are unable to meet the normal mortgage insurance requirements of a 5 per cent deposit. To be eligible for the loan you generally only need to have savings of at least 2.5 per cent. Borrowers are able to take out a variable-rate loan or a fixed-rate loan for one to five years. The maximum loan size is $500,000.
What it costs The advertised interest rate on the loan is 6.875 per cent, and the comparison rate, or "true" cost of the loan, for a $150,000 home loan over 25 years is 7.02 per cent. The establishment fee on the loan starts at $750 and there is a monthly administration fee of $8. The redraw fee is $25.
Pros If you have only a small amount of savings and a good income, this offers a way to get into the housing market. However, be aware that because of the additional risk St George will look more closely at your credit history and ability to repay.
For instance, Bill McCabe, the chief manager of specialised mortgage solutions at St George, says with a normal home loan it will make sure the potential borrower has no defaults on their credit history.
"With a no-deposit home loan we will try and ring as many of the existing lenders as we can to make sure they are right up to date with their repayments."
The other plus is that the loan is fully featured. It is possible to make additional repayments and redraw subject to the bank's approval. With the variable rate version of the loan you can also set up a 100 per cent mortgage offset.
Cons The bank will currently only lend on properties in capital cities and major regional centres. In NSW this includes Sydney, Wollongong, Newcastle, Gosford, Port Macquarie, Coffs Harbour, the Blue Mountains corridor (Penrith to Blackheath) and Shoalhaven.
If you choose to refinance your loan with another lender within three years of the settlement date, you will have to pay an early termination fee. This fee is 1.5 per cent of the balance owing on your loan account at the date of repayment.
Where it fits There are a number of other lenders offering no-deposit or 100 per cent home loan products. Some are also willing to lend to borrowers with a minimal deposit, although they do not offer an official product.
Lisa Montgomery, the chief executive at research house InfoChoice, says within this area of the market the St George product is "quite comparable".
It is possible to get a lower rate from New Loan, which has an advertised rate of 6.49 per cent and a comparison rate of 6.55 per cent on a $150,000 loan over 25 years. However, to qualify for the New Loan product borrowers must have slightly more in savings to cover mortgage insurance and expenses, at 3 per cent of the property's value. Its maximum loan size of $300,000 is also lower than the $500,000 maximum set by St George.
In the context of the broader mortgage market, the rate on the St George product is significantly higher than other standard variable rate products.
"The highest standard variable rate is 6.57 per cent. You can get a HomePath [loan] at 5.65 per cent and a RESI [loan] at 5.85 per cent," says Montgomery.
© 2003 The Age