Due to the coronavirus pandemic, it may be more difficult for some home buyers to get no-or low-deposit home loans. For example, the nation’s largest lender, the Commonwealth Bank, has said it would be toughening up its lending policies for new borrowers to ensure they can comfortably meet their repayments.
In addition, some borrowers with a loan-to-value ratio (LVR) above 80% – in other words a less than a 20% deposit – may find it more difficult to be approved for lenders mortgage insurance (LMI). QBE, one of the major LMI providers in Australia, has suspended its LMI cover for new loans taken out by borrowers working in industries that have been directly impacted by the pandemic, such as gyms, beauty salons, tourism and hospitality industries. This means some home buyers would no longer be able to get a loan without a 20% deposit.
Despite the pandemic, the government’s First Home Loan Deposit Scheme (FHLDS) is still operating and may help eligible applicants buy a home without LMI. Under the scheme, the Australian Government will guarantee a limited number of low-deposit loans, for eligible low- and middle-income earners, but these borrowers would still need to have saved up a deposit of at least 5% of a property’s value.
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. However, some may offer minimum deposit home loans with an 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 LMI. At the time of writing, Canstar’s database contains 496 principal and interest owner-occupier home loan products with an LVR of 95% or higher. This includes variable and fixed products and does not include package products.
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, legal fees, building inspections and more.
As for whether a no-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% LVR 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 lack the 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
- Personal loan
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 and 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 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 applicants.
If you receive a large monetary gift (say from the ‘Bank of Mum and Dad’) or ‘windfall’ from something like an inheritance or the lottery, you may decide to put that towards a house deposit. These 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.
Using a personal loan to fund your home loan deposit is technically possible in some scenarios, but it is not a common or easy method for buying a home. Some lenders do offer home loans to those who get a personal loan for a deposit, if the borrower can prove they have a high enough income to repay both the personal loan and mortgage.
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.
- Usually you will have to pay Lender’s Mortgage Insurance (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 is often 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 (or even more than the purchase price in the case of ‘105% loans’), 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’.
This article was originally published by TJ Ryan.
Main image source: zstock (Shutterstock)