105% LVR Home Loan Viability Improves As Construction Cost Inflation Tracks Below Pandemic Peaks

As Australia sees its most mild rise in construction costs in over ten years, the feasibility of LVR home loan is improving. Ultra-high leverage borrowing is becoming more feasible due to the easing of building cost pressures and more favorable lending terms.

In contrast to the volatility seen during the epidemic, Australian building costs are currently increasing at their slowest rate in 15 years. According to CoreLogic, the annual growth in residential construction costs has slowed to 2.9 percent as of March 2025, from a record of 11.9 percent in December 2022. Because it lowers project risk and increases budget certainty, this stabilisation is especially important for borrowers thinking about LVR home loan structures above 100 percent. 

Understanding the 105% Lending Structure

A loan-to-value ratio exceeding 100% means borrowing more than the property’s value. While this approach may appear counterintuitive, it provides a legitimate pathway for buyers who cannot accumulate a traditional deposit within reasonable timeframes.

The typical structure begins with a 95% base loan. Lenders then capitalise the Lenders Mortgage Insurance into the total amount (usually 3% to 5% of the loan value). Some lenders offer an additional line of credit to cover stamp duty and legal costs. Total borrowing reaches around 105% of the property’s value.

Practical Application:

• Property value: $650,000
• 95% LVR loan: $617,500
• Capitalised LMI: $18,500
• Line of credit for costs: $15,000
• Total borrowing: $651,000 (100.2% LVR)

Despite borrowing over 100%, lenders maintain requirements for demonstration of 5% genuine savings. Strong credit history and stable employment remain essential criteria for approval. Currently only select non-bank lenders and specific major bank programs offer these products.

The Construction Cost Trajectory: From Crisis to Stabilisation

Before COVID-19, Australian construction costs grew at a predictable 4% annually. The pandemic fundamentally disrupted this stability. The HomeBuilder stimulus program drove dwelling approvals up 40.2% almost overnight while global supply chains collapsed simultaneously.

Peak Crisis Period (2021-2022):

• Timber prices surged 30% to 40%
• Steel costs doubled in some industrial applications
• Building materials increased 12% in 2021 alone—the strongest annual rise since 1981
• Fixed-price contracts became untenable across the industry
• The 2023-24 financial year recorded 2,832 construction company insolvencies

The moderation began in 2023 as supply chains normalised gradually and material cost inflation eased. March 2025 figures now reveal annual growth at just 2.9%—the lowest rate in 15 years. Quarterly growth sits at 0.5%. Construction costs have climbed 31.3% cumulatively since COVID began, but the rate of increase has fallen below the pre-pandemic average for six consecutive quarters.

Driving Forces Behind the SlowdownMaterial Price Stabilisation

Steel prices normalised after their 2021-22 surge. Timber supply chains recovered operational capacity. Diesel costs fell to pre-pandemic levels. Concrete block prices dropped 15% in the December 2024 quarter.

Softened Market Demand 

Dwelling approvals remain 7.1% below the decade average over the 12 months to November 2024. Builders are offering discounts to attract customers. The Consumer Price Index showed a 0.6% deflation for new dwelling purchases in November, driven by promotional offers.

Persistent Labour Pressures

Skilled trade shortages continue affecting the industry. Multi-year wage agreements have locked in steady increases. Labour has now become the primary cost driver, replacing materials in that role.

The High-LVR Lending Expansion

Ultra-high LVR home loan products have quietly become the mortgage market’s fastest-growing segment. APRA data from the June 2025 quarter reveals loans to borrowers with deposits under 5% total $14 billion. This represents 2.1% of the entire mortgage market and is growing at 20% annually, compared to 15% growth for total mortgage lending.

The Big Four banks originate 90% of ultra-high LVR loans, well above their 75% overall market share. This indicates major banks are competing intensely for these borrowers rather than relegating high-LVR lending to fringe players.

The economics reflect genuine deposit hurdles facing Australians. The average first home buyer deposit reached $159,000 in 2025—up 50% since 2020. It now takes Australians approximately 10 years on average to save a 20% deposit. In Sydney that figure stretches to 15.7 years.

Three Reserve Bank rate cuts through 2025 have improved borrowing capacity. The cash rate fell from 4.35% to 3.60% with reductions in February, May and August. Australian Bureau of Statistics data shows mortgage stress indicators at 18.5% of borrowers facing extreme risk in June 2025—a slight improvement from 19.7% the previous year.

Why Stabilisation Matters for High-LVR Borrowing

During the 2021-22 pandemic peak, ultra-high LVR construction loans faced severe operational challenges. Cost blowouts mid-project were common. Construction delays added three to six months on average. The risk of negative equity soared as actual costs exceeded property valuations.

Today’s environment presents a markedly different risk profile. A land and construction project costing $700,000 at 2025 pricing with 105% LVR financing totals $735,000 borrowed. With a 12-month construction period at the current 2.9% escalation rate, risk exposure approximates $20,300 in potential cost increases.

Compare that to 2022 conditions: the same project would face an $83,300 escalation risk at the 11.9% peak rate. This four-fold difference made 105% LVR home loan construction products essentially non-viable for most borrowers. The improved cost predictability has fundamentally altered lender risk assessments.

The Home Guarantee Scheme Expansion

From 1 October 2025, the Home Guarantee Scheme removed a significant market constraint. The expanded scheme now offers unlimited places and raised property price caps. First home buyers can secure loans with just 5% deposit and no LMI requirement under the scheme.

While the scheme covers standard 95% LVR loans rather than 105% products, the expansion creates important spillover effects. It increases overall lender comfort with low-deposit borrowing and demonstrates government support for high-LVR lending patterns. Industry analysis suggests this policy shift will accelerate ultra-high LVR growth, with forecasts indicating this lending segment could double its market share to 4% or more within 18 months.

Critical Risk Considerations

1. Interest Rate Premium: Ultra-high LVR products carry an additional 0.15% to 0.30% above standard rates. Current market rates sit around 5.8% to 6.2% for 95%+ LVR owner-occupier variable loans.
2. LMI Costs: For a $600,000 property at 95% to 100% LVR, expect premiums between $15,000 and $35,000. This amount gets capitalised into the loan with interest accruing over 30 years. Critically, LMI protects the lender rather than the borrower.
3. Debt Burden: A $570,000 loan at 95% LVR versus $480,000 at 80% LVR creates substantial differences. Over 30 years, total interest payments increase by approximately $180,000.
4. Negative Equity Risk: Borrowers could owe more than their property’s worth if values decline. Currently this risk appears contained, property values rose 4.9% nationally between July 2024 and July 2025 according to CoreLogic data.

Professional Guidance and Strategic Approach

Empower Money and other financial services providers emphasise that professional guidance remains essential for navigating these complex lending products. According to Empower Money, these loans are particularly valuable for first home buyers and people re-entering the property market without access to government concessions.

Key strategic steps include:

1. Securing pre-approval before property hunting to clarify borrowing capacity
2. Factoring 4% to 5% annual construction cost escalation into budgets for building projects
3. Maintaining genuine savings demonstration of 5%
4. Ensuring stable employment and strong credit history
5. Assessing total interest costs over the loan lifetime

Market Outlook and Forward Indicators

The confluence of stabilising construction costs and supportive government policy has created particular market conditions. Australian Bureau of Statistics data shows dwelling approvals increased 12% in September 2025 to 17,019, marking renewed upswing in building activity.

Forward indicators suggest sustained moderate cost growth rather than dramatic shifts. Infrastructure Australia’s capacity assessments indicate construction demand will remain elevated through this decade, particularly in Queensland and Western Australia. This sustained demand environment suggests costs are unlikely to decline, though the pace of increase appears manageable.

Labour costs remain the primary uncertainty moving forward. Multi-year wage agreements are locking in 3% to 5% annual increases. Industry forecasts predict 4% to 6% annual construction cost growth through 2025 and 2026, with labour as the main contributor.