Saving up funds for a deposit is a big home-ownership hurdle for many first-time buyers, and rising property prices in many parts of Australia are making that hurdle all the more difficult to overcome.
If a no-deposit home loan is an option you are looking at, it’s important to do your research so that you understand the potential benefits and risks. It may also help to assess some of the alternative options available to you, so you can make an informed decision based on your situation.
Can you get a home loan with no deposit?
In Australia, you may be able to get approved for a loan of 100% of the purchase price of a home through some lenders if you can meet certain conditions, such as having a guarantor on the loan. This is usually determined on a case-by-case basis by the lender.
That said, it’s generally not all that common for lenders to offer home loans with absolutely no requirement for the borrower to have a deposit. Instead, some may offer minimum deposit home loans with an loan-to-value (LVR) of 95% if the borrower has a reliable income source and meets other criteria such as having a good credit score. This means the borrower still needs to save a deposit of 5% of the purchase price and may need to pay for lenders mortgage insurance (LMI).
Even if you don’t need to provide a deposit for your home loan, there are typically other upfront costs involved in buying a home you will need to budget for, such as stamp duty in some states and territories, legal fees, building inspections and more.
As for whether a no- or low-deposit home loan is a good idea or not, as we explain below, they aren’t necessarily suitable for every type of borrower, and there are a few common risks you may want to be aware of before applying for one.
Lending criteria for no-deposit, 100% home loans
Lenders typically apply very strict criteria when looking at applications for no-deposit home loans to account for the level of risk involved in lending to someone in that situation. Requirements for no-deposit borrowers may include:
- High credit score: Borrowers must generally have a high credit score with one of the main credit reporting agencies (Equifax, Illion or Experian).
- Responsible repayment history: Similarly, borrowers are typically required to show they have been paying all of their current debts on time, such as credit cards, personal loans and rent.
- Stable employment income: No-deposit borrowers generally must have a stable, ongoing job that provides an income high enough that they can afford to repay the loan.
What are your options if you’d like a no- or low-deposit home loan?
Examples of how you may be able to get a home loan if you don’t have enough savings for a deposit include:
- Guarantor provides deposit or co-signs loan
- First Home Owners Grant (FHOG)
- First Home Loan Deposit Scheme
- Monetary gift
- Equity in another property
We’ve explained each of these options in more detail below.
Asking someone to go guarantor for you
One option for breaking into the property market is to ask a family member if they would be willing to co-sign your loan as a home loan guarantor. Some lenders may let borrowers borrow up to 100% of the property value if they have a parental guarantor.
It’s not a request that should be made or granted lightly. If your parents go guarantor on your loan, it means they need to provide documentation proving they could repay your loan if you failed to meet the repayments. It also means that if you did miss a repayment, they would become liable for the loan repayments. Find out more about the requirements for a guarantor home loan, including the pros and cons of asking your parents to help you buy a house.
First Home Owners Grant
First home buyers looking for a financial leg-up may be eligible for a First Home Owners Grant from their state government, if they meet certain requirements, and if they plan to live in the property as their home for a certain timeframe. Find out more about the First Home Owners Grant (FHOG).
First Home Loan Deposit Scheme
The First Home Loan Deposit Scheme is designed to help some eligible first home buyers get a loan with a deposit as low as 5%, without needing to pay for LMI. The government essentially acts as a guarantor and secures the remaining deposit to bring the home buyer up to 20%. The guarantee is limited to 10,000 first home buyers a year and there is an income cap of up to $125,000 per year (or $200,000 per year for couples) for eligible applicants.
Family Home Guarantee
The Family Home Guarantee is a government scheme that allows eligible single parents with dependants to buy or build a home with a deposit of as little as 2%. Unlike some other schemes for home buyers, the Family Home Guarantee is not limited to people purchasing their first home. According to The National Housing Finance and Investment Corporation (NHFIC), 10,000 Family Home Guarantees will be available over four financial years from 1 July 2021 to 30 June 2025.
If you receive a large monetary gift (say from the ‘Bank of Mum and Dad’) or a ‘windfall’ from something like an inheritance or the lottery, you may decide to put that towards a house deposit. Essentially you would be buying a home without a deposit of funds you had saved up yourself. These kinds of funds may be accepted by some banks but lending requirements will differ. For example, you may need to provide a “gift letter” which says the monetary gift is non-refundable and unconditional – or in other words, that there’s no expectation the money will be repaid. It’s worth noting, though, that some banks will only accept a deposit made up of “genuine savings“, and therefore wouldn’t accept funds you haven’t built up yourself by saving.
Equity in a property you already own
Equity is the difference between how much your property is now worth and how much you still owe on the home loan for that property. If your property is now worth more than you still owe on the home loan for it, this is known as ‘positive equity’. If you already have a home loan on a property, you may be able to use some of the positive equity on that loan as a deposit towards buying another property – if you can afford to repay two mortgages at once, that is.
Are home loans with no deposit a good idea?
While there are some potential upsides to no-deposit home loans, there are also a few key reasons why it’s an approach you might choose to avoid, and instead try to raise as large a deposit as you can.
Possible benefits of home loans with no deposit
- A home loan with no deposit may give first home buyers with a small amount of savings a way to buy in a property market which might otherwise be unaffordable. However, home loans with no savings are not generally designed for first home buyers.
- Property investors with some equity in a property but less genuine savings in the bank could use equity for the deposit on an investment home loan.
- In the time it would take to save up a sizeable deposit for a home, the property market may have risen significantly, depending on the individual property and its location. In that sense, purchasing a home without a deposit may help the buyer buy prior to this rise in property prices and secure the home at a comparatively lower price.
Possible disadvantages of no deposit home loans
- Some lenders charge higher interest rates if you borrow more than 80% of the property purchase price. Plus, the more you borrow, generally the more interest you’ll have to pay the lender over the life of the loan.
- Usually you will have to pay for LMI, if you have a deposit that’s less than 20%. There is also a chance that the LMI provider won’t agree to insure the loan, even if it is approved by your lender, in which case the loan approval may be withdrawn by your lender.
- There could be a lengthy and difficult approval process for no-deposit home loans. This is because of the need for additional credit checks on the borrower and the guarantor if applicable.
- It may not be a good idea to borrow the full purchase price, because if the value of your property decreases while you are paying off your mortgage, you may end up owing more than it is worth. This is called being in ‘negative equity’.
- If you are in a financial situation where saving up for a deposit is not possible, taking on a large amount of debt in the form of a home loan may put you under further financial pressure. For example, while the home loan repayments may be affordable now, if interest rates were to increase, you may find it difficult to repay the loan.
Main image source: zstock (Shutterstock.com)