Understanding a 98% Home Loan 

A 98% home loan is, in essence, a variant of the 95% home loan, incorporating an additional 3% for Lenders Mortgage Insurance (LMI) directly into your home loan balance. This process of LMI capitalization serves to eliminate initial costs, facilitating a swifter realization of your home purchase. 

Approval Criteria 

To secure approval for a 98% home loan: 

• Minimum Deposit: You must have a minimum deposit of at least 5%. 

• Owner-Occupier Property: The property must be for personal residence, not for investment purposes. 

Lenders Offering 98% Mortgages 

Only a select few lenders permit borrowing up to 98% of the property value. These lenders have stringent qualifying criteria due to the high loan-to-value ratio (LVR). Additional considerations include employment history, rental history, and income. 

COVID-19 Changes and Lending Landscape 

Several major banks, including Virgin Money and BOQ, have withdrawn from offering 98% home loans due to uncertainties in the property market. Specialist lenders with flexible policies remain viable options. 

Deposit and Associated Costs 

You’ll need a minimum deposit of 5% plus funds for property purchase costs like stamp duty, legal fees, and application fees. Stamp duty and LMI fees are significant, with only LMI fees added to the loan balance. 

While 98% home loans are suitable for first home buyers exempt from stamp duty (up to a certain threshold), they are also available for second home buyers with the added cost of stamp duty. 

Interest Rates 

Interest rates on 98% home loans are slightly higher than standard rates, reflecting the increased risk for lenders. The aim is to switch to a lower-rate mortgage once the loan-to-value ratio falls below 90% after a couple of years. 

Genuine Savings Requirement 

While lenders typically prefer genuine savings for loans over 90%, some specialist lenders consider borrowers without genuine savings, albeit at higher interest rates. Genuine savings enhance lender options. 

Postcode and Property Restrictions 

Due to the higher risk associated with 98% home loans, lenders prefer properties in prime locations (CAT 1 and CAT 2). Residential houses and certain types of apartment units with specific characteristics are considered, while construction loans are limited.