No Deposit Home Loan
Planning to buy a home usually means coming up with the recommended 20% of the total value of your chosen property as the bank deposit. But what about those who are unable to save for that amount?
The good news is that a no-deposit home loan can offer a viable pathway to homeownership. It allows prospective home buyers to secure a mortgage with zero deposit. The easiest way to do a zero deposit home loan is via a guarantor home loan, but most lenders require at least 5% to secure approval.
While securing a no-deposit home loan can be challenging, it is not impossible. Let’s discuss the particulars of a no-deposit home loan in Australia, how they work, the benefits, and the most important considerations before opting for this loan option.
What is a no-deposit home loan?
A no-deposit home loan isn’t necessarily 100% deposit-free. They might make a particular exception depending on the borrower’s profession, income level, credit history, or if he or she is a first time home buyer. But as a general rule, there’s really no actual zero deposit mortgage product.
Again, most lenders require at least 5% deposit, which isn’t zero, but is far more achievable than saving up for the 20%.
No-deposit home loans are designed to help first-time home buyers, young professionals, and families struggling to save the significant amount needed for a deposit, Lenders Mortgage Insurance, and other fees.
How do I get approved at 100% no deposit?
The likelihood of getting a home loan without a deposit is pretty low, but there are a couple of ways you can explore in order to do so:
Be eligible for the First Home Loan Deposit Scheme
The First Home Loan Deposit Scheme is a nationwide government program designed to assist first-time buyers acquire a home through a minimum deposit of 5% and without needing to pay Lenders Mortgage Insurance.
Single-person buyers earning $125,000 a year, or couples earning up to $250,000 a year will be eligible for the scheme. The provision is only for owner-occupiers, i.e. those who intend to move in and reside in the home and not rent it out or sell.
First Home Loan Deposit Scheme has specific regulations for each state or territory. Find out more here (link).
Receive the deposit as gift
Your parents, other family members, or friends can provide the deposit as a gift. The advantage here is you get the much-needed deposit no strings attached.
The gift could be 5% to 15% of the home’s purchase price, and even though it’s shown to be a gift and not part of your genuine savings, there are lenders that will consider the loan.
Use a guarantor
Another option is to get a guarantor home loan option. This type of mortgage where someone else, again usually a family member or a relative, agrees legally to pledge a percentage of your deposit through their own home equity.
Because a guarantor is risking their own assets to cover another person’s home loan, guarantors are often limited to being parents or immediate family members.
Guarantors also take on the mortgage in the event that you are unable to make repayments in the future. Lenders feel more comfortably approving your no-deposit home loan as they have security in the guarantor’s equity and assets. In fact, some lenders offer 105% for a guarantor home loan, which covers the entire loan plus additional costs like stamp duty and ongoing loan fees.
Should I opt for no-deposit home loan?
Here are the most significant considerations when choosing a no-deposit home loan:
- Prepare for higher interest rates, unless you can lessen the loan-to-value ratio (LVR) of your financing.
- You could be required to pay Lenders Mortgage Insurance (LMI) to protect the lender against higher risk.
- Expect limited loan options and stricter eligibility criteria (e.g., being approved for the First Home Loan Deposit Scheme).
- Obtaining a no-deposit home loan means you can demonstrate an excellent track record of financial behavior when it comes to credit use, paying bills on time, and managing personal debt if there is any.
- Keep in mind that most lenders will be strict about the location of your property. Homes in major cities, towns, or regional centres will most likely be approved, but you’d be hard-pressed to secure a no-deposit loan in remote locations.
Saving for a deposit could delay your homeownership. Most people find it hard to save up for a deposit especially with rising interest rates, and you could end up in the same financial situation as you were a year ago.
Delayed homeownership means potentially missing out on capital gains as years tick by. And if property prices rise faster than you can save, you actually end up paying more for a property in the future.
As long as you understand what’s involved in a no-deposit home loan, then it’s a viable option to fast track home ownership.
Want a more straightforward way to apply for a no-deposit home loan? Seek advice from our mortgage specialists. We respond to your needs especially if you’re struggling to save up for the standard 20% deposit. Our team has access to the 4 major banks as well as boutique lenders that can offer beneficial terms to meet you where you are at financially. Talk to us today to get started.
