Forums / Community / Opinionated! / Why can’t we get 100% finance on property

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  • Profile photo of kerwynkerwyn
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    @kerwyn
    Join Date: 2004
    Post Count: 145

    Hi All
    Just thought I would open up a debate maybe someone can shed some light on the matter.
    Why can’t we in Australia get 100% financing for property investing from the banks. I believe that in most European countries you can easily get 100% finance, but not us?
    Why can you go to a bank and get over 100%+ finance on a $300000 car that drops in price massively once you drive it out of the showroom? Why will the banks lend 100%+ on something that is going to be near to worthless in 10 years?

    On the other hand why do the banks insist on us paying a deposit of 10 to 20% and then insist on mortgage insurance if under 20% if you buy a $300000 house? This is a thing that is not going to drop in price the minute you open the front door?
    In 10 years time it is going to more than likely doubled in price not be worthless?
    Got me?
    Kerwyn. [blink]

    Profile photo of foundationfoundation
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    @foundation
    Join Date: 2005
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    1) Houses are much more expensive than cars…
    2) Property is not a risk-free investment.

    Originally posted by kerwyn:

    This is a thing that is not going to drop in price the minute you open the front door?

    It can drop in price before you even get to the front door! Talk to ‘investors’ who bought options for apartments off the plan in Melbourne & Sydney 2 years ago…

    In 10 years time it is going to more than likely doubled in price not be worthless?

    I strongly disagree. I think many people are currently buying houses that will be worth less in real (inflation adjusted) terms in 15+ years time.
    Cheers, F.[cowboy2]

    Profile photo of woodsmanwoodsman
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    @woodsman
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    Ahhh foundation, you are nothing if not consistent.

    As for Kerwyn’s question, I am also looking into finance or at least some information on finance for future purchases in Greece.

    From what I have been able to find out, mortgage insurance or Mortgage Indemnity Gurantee (MIG) as it is called in the UK, seems to be payable for deposits less than 10% (at least this is what the web-site I am looking says).

    Greece from one bank’s website says up to 80% of market value for home/apartment purchases, construction finance and renovations which are up to 70% of market value or 100% of the repair cost.

    Not sure what other countries you may be referring to though. Did you have any examples?

    Profile photo of TerrywTerryw
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    @terryw
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    Lenders need a buffer in case they have to foreclose. Usually forclosing takes many months, and itnerest could be building up during this time as well as various legal costs. And then when they sell, they may not be able to get what it initially valued at. So a buffer is needed.

    Terryw
    Discover Home Loans
    Mortgage Broker
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of foundationfoundation
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    @foundation
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    Originally posted by woodsman:

    Ahhh foundation, you are nothing if not consistent.

    Why thank you~![biggrin]

    As long as people continue to make assertions such as

    In 10 years time it is going to more than likely doubled in price

    I guess I’ll just keep playing the record…[biggrin]

    On the other hand if only I could get my membership to somersoft.com to work – they have become much less irrationally exhuberent of late – I might fit in there a little better!
    Cheers, F.[cowboy2]

    Profile photo of kerwynkerwyn
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    @kerwyn
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    Hi All
    Thanks for the replies.
    Yes I understand why the banks say they need a buffer but how do they get their money back from the $300000 car that you paid nothing for and they loaned you the cost of car + rego + insurance etc when you can’t pay for it and it is repossessed? 6 to 12 months down the track it is worth at least 25% less than when you bought it: houses in general tend not to do that?
    What the banks say they are doing to protect themselves is a smokescreen to cover up the fact that they are ripping everyone off.
    Some of the European countries I believe that will lend 100% are Germany, Norway is another. Russia is another country that will finance you 100% but they do have a big administration cost to get in to the property.

    Yes Foundation: I should have clarified my statement a bit better by excluding one horse towns, Broken Hill, the back of Bourke etc. Although I do believe that the larger cities tend to double every 10 years, the one I live in certainly has. Most of the statistics I have seen seem to indicate that also.
    Kerwyn
    [wink]

    Profile photo of foundationfoundation
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    @foundation
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    how do they get their money back from the $300000 car that you paid nothing for and they loaned you the cost of car + rego + insurance etc

    Hi Kerwyn, I think you’ve accidentally added an extra zero in there. I doubt there is a financial organisation who would lend Three Hundred Thousand dollars with nought down![biggrin]

    I do believe that the larger cities tend to double every 10 years, the one I live in certainly has. Most of the statistics I have seen seem to indicate that also.

    I don’t really think we should open this tin again, but briefly, you’ve neglected to factor in inflation. House prices have increased over the long term by less than 2%pa above inflation. For nominal house prices to double every ten years, inflation must run at an average of around 6% (otherwise renters won’t be able to pay the rent and first time buyers will be non-existent). Taking into account the effect this would have on interest rates (anyone for ten percent plus?), is this really a desirable scenario?

    Cheers, F.[cowboy2]

    Profile photo of Nat RNat R
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    @nat-r
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    You can get 100% finance in Australia, either from a bank or one of the specialist lenders. It has been available since the early to mid nineties.

    The reason the banks don’t offer it on a broader sense is that with any lend over 80% they typically use LMI (if they don’t use LMI there is a negative impact on their capital usage and therefore profit margin) and the LMI providers have stuggled in the past to insure beyond 95%.

    One of the LMI companies does do 100% but they find the demand is actually no that high.

    Profile photo of Michael WhyteMichael Whyte
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    @michael-whyte
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    Nat,

    Nice post! Succinct and informative…

    If I could give kudos (like you can on SS) then I would. [biggrin]

    Interesting that demand for 100% LVR is low though. I know you need insurance as you pointed out, but would have thought that this would allieviate the “endless deposit” problem that Peter Spann talks about. In his book he claims the 80% LVR is the biggest impediment to building the multi-million dollar portfolio, not servicability. That’s why he looks at the “value addable” properties then revalues to create equity for the next deposit.

    I guess there’s a limit to the number of 100% LVR loans an institution will extend even when insured…

    Cheers,
    Michael.

    Profile photo of Brady5Brady5
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    @brady5
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    Hi Kerwyn,
    Interesting question you have just raised!!
    Please consider this :

    If you have selected a property for the purposes of aquisition as an “astute investor”, you will be making an offer based on the WHOLESALE price of the property. Once you present this property to the bank for evaluation, their estimate on the value of this property should reflect the RETAIL
    price that the ordinary man (or woman) on the street would be looking and prepared to pay. Based on their valuation with a LVR, if this effectively is NOT 100% of your proposed offer to purchase, then you shouldnt be buying the property in the first place. This is all about beating the odds, and buying at current market value is not the name of the game.
    Anyhow, those are my thoughts.
    Brady5

    Profile photo of Nat RNat R
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    @nat-r
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    Brady5 …Most banks (and by law actually) take the price paid as the value ie. they take the lower of the valuation or contract price and use that to calculate the LVR.

    Michale Whyte…not all lenders use traditional LMI insurance against their 100% loans….so insurance concentration may not be the problem you think it is.

    Profile photo of foundationfoundation
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    @foundation
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    Hi Brady5,
    Interesting thought, but how do you find out the ‘wholesale price’ for a particular property?
    Cheers, F.[cowboy2]

    Profile photo of Brady5Brady5
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    @brady5
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    Foundation,the WHOLESALE price of a property is the price you can offer AND HOPEFULLY SECURE the property after having established your NOI (net operating income) then adding on whatever $$ you consider viable to make this a positively geared situation.
    Doesnt mean your offer will be attractive to the vendor, but if accepted, then this is how the road to financial independence is created.It will then be positively geared, if not , move on.

    Profile photo of TerrywTerryw
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    @terryw
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    Post Count: 16,190

    Good points Kerwyn.

    And yes, you can get 100% finance for expensive cars. Seen one recently for $250,000.

    Terryw
    Discover Home Loans
    Mortgage Broker
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Brady5Brady5
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    @brady5
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    Sorry Nat R,

    I didnt mean to ignore your comment, just scrolled down too fast. {still finding my way on this forum) and have only just seen your respnse.

    I have never been able to succesfully apply for a home loan in all my years of property investing, where any reputable lending source will take a “purchase price” as an accurate indication of the value of a property as part of their dd for a loan proposal. After all, this is one of the fantastic things about RE investing, that the little man like me has this safety net of having a BANK VALUATION to back up my planned purchase, and not pay an extortionate, unfortunate price.
    All the best,
    Most importantly of course, one would hope that pre approval of finance up to a certain value will all ready be obtained prior to an offer being submitted, (but a subject to..clause SHOULD wisely be included for protection) so as to put you one step ahead of the opposition.
    Brady5

    Profile photo of Nat RNat R
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    @nat-r
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    Post Count: 224

    Bardy5…..don’t forget we are talking the LOWER of purchase or valuation for calculating LVR.

    Profile photo of Brady5Brady5
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    @brady5
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    Nat R
    Listed price of property is eg $100,000
    Property purchased at $80,000(although bank is not yet advised of this figure)as you want their valuation!!
    Bank valuation returned at $100,000,
    80% LVR on valuation equals $80,000 (full purchase price)
    100% financing.
    (the bank has NO interest in your purchase offer or price, only 80% of valuation..so there is no “lower of” as far as they are concerned)
    Cheers,
    Brady5

    Profile photo of Nat RNat R
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    @nat-r
    Join Date: 2004
    Post Count: 224

    Understood…have you actually done this or are you quoting a theoretical example??

    The reason I ask is that most of the mortgage deals I have seen talk about the lesser of Valuation or purchase price.

    Profile photo of woodsmanwoodsman
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    @woodsman
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    the bank has NO interest in your purchase offer or price, only 80% of valuation..so there is no “lower of” as far as they are concerned

    There are very few banks today that will take a higher valuation over contract price even after 12 months from the contract date (ie OTP). I have recently gone through this exercise. (I had only three to choose from, who would take valuation price given the contract was signed 16 months ago). Otherwise, it is the lower of contract or valuation price.

    After all, this is one of the fantastic things about RE investing, that the little man like me has this safety net of having a BANK VALUATION to back up my planned purchase, and not pay an extortionate, unfortunate price

    Have I missed the sarcastic sentiment behind this statement?

    Profile photo of kerwynkerwyn
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    @kerwyn
    Join Date: 2004
    Post Count: 145

    Hi Foundation
    Take this scenario: house sold on 2-8-95 for $100000, sold on the 27-10-04 for $225000. Now $100000 + $100000 = $200000 price doubled, sold for $25000 over and above or another 25% more on the original selling price, so more that doubled. Actual figures because I bought the house at $225000.
    Kerwyn. [wink]

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