What are 106% home loans and do lenders still provide them?

106% home loans were a way for home buyers to borrow for both a home itself and the expenses associated with its purchase, although they are no longer a feature of the home loan lending market in Australia.

No-deposit home loans are a way for borrowers with limited savings to get a foot on the property ladder. Since the global financial crisis (GFC), however, lenders only offer limited options of these, with 106% home loans no longer on the table.

What are 106% home loans?

A 106% home loan is a type of home loan that used to exist in Australia. It allowed buyers to borrow the full purchase price of a home, as well as additional money required to cover expenses, like stamp duty, conveyancing and lender’s mortgage insurance (LMI).

These types of home loans were theoretically geared towards people who wanted to get a foot on the property ladder, such as first home buyers, but did not have sufficient savings to cover the associated expenses with buying a home.

106% home loans differed from traditional types of home loans in that lenders considered them a riskier proposition. As such, they typically came with higher interest rates, extra lender’s mortgage insurance, and stricter lending criteria.

Can you still get 106% home loans in Australia?

106% home loans are no longer offered by home loan lenders in Australia. This has been the case since the GFC, when the collapse of the US housing market in 2008 caused headaches for financial institutions around the world, and led lenders to tighten their belts.

Can you still get no-deposit home loans in Australia?

It is still possible to get a no-deposit home loan in Australia, but instead of a 106% home loan, you will need to consider an alternative option, such as applying for a guarantor loan or using equity in a property you already own as a deposit.

Are no-deposit or low-deposit home loans a good idea?

Keep in mind if you are considering a no-deposit home loan or a home loan with a high loan-to-value (LVR) ratio that there are risks involved. Taking out a home loan with a high LVR ratio (such as a 95% home loan or a no-deposit home loan) can lead to you being charged a higher interest rate, needing to pay for LMI and experiencing a difficult approval process (or being declined on your home loan based on responsible lending requirements).

Taking on a large amount of debt may also put you under financial pressure. If the value of your property decreases while you are paying off your mortgage, you could experience negative equity, and be at greater risk of foreclosure if interest rates rise, or your circumstances change, and you cannot meet mortgage repayments.

How do guarantor home loans work?

A guarantor home loan is a kind of home loan that allows a family member or other trusted person to ‘guarantee’ a loan for you, meaning that they agree to take on the responsibility of making your loan repayments if you are unable to do so.

Different lenders will have different requirements when it comes to approving someone to act as a guarantor. Generally speaking, though, the person will need a good credit score and a stable income, and potentially some form of equity in a property.

Some lenders may be willing to let you borrow 100% of a property’s value with a guarantor, meaning you will not require a deposit, but this will depend on the individual lender as well as the financial circumstances of the person acting as guarantor.

How do you use equity as a deposit to buy a home?

If you have equity in a property, you may be able to use this equity to buy another one without a deposit. It is worth bearing in mind that this option is not for first home buyers as it would require you to own and have at least partially paid off a property already.

Home equity is the difference between the value of your home and how much you still have left to pay off on your mortgage. Say, for example, that your property is valued at $900,000 and you have $100,000 left on your mortgage – your equity would be $800,000.

You may be able to use the equity you currently have in your home as a deposit on another property, although as is the case when you are applying for any home loan, you will be subject to any individual lender’s criteria and assessment of your financial position.

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