Co-author: TJ Ryan
Can you get a home loan with no deposit?
In Australia, you can get approved for a loan of 100% of the purchase price of a home without a deposit 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.
Most lenders don’t usually offer no deposit home loans, but they may offer minimum deposit home loans with an LVR of 95% if the borrower has a reliable income source and meets other criteria. This means the borrower still needs to save a deposit of 5% of the purchase price.
Top interest rates for 95% or higher LVR home loans
The table below displays a snapshot of variable rate home loan products available for first home buyers on Canstar’s database, with links to providers’ websites. The table is sorted by the advertised interest rate (lowest-highest).
The products displayed are based on a loan amount of $350,000 in NSW at 95% LVR or higher and available for Principal and interest repayments. Read the Comparison Rate Warning.
Regardless of the amount of deposit or no deposit, borrowers should remember that there are other upfront costs involved in buying a home, 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 are usually not a wise financial decision for most types of borrowers.
Lending criteria for no deposit, 100% LVR home loans
Lenders typically apply very strict criteria when looking at applications for no deposit home loans as they are substantially riskier. The usual requirements for no deposit borrowers may include a clean credit rating, a strong repayment history, stable employment and a standard type and location of your property:
- Spotless credit rating: Borrowers must have a spotless credit history and credit rating with the main credit reporting agencies (Veda Australia, Dun&Bradstreet, Experian). Australian lenders do not make exceptions to this policy in cases with no deposit, because of the legal requirements for them to lend responsibly.
- Responsible repayment history: Borrowers must have been paying all of their current debts on time, such as credit cards, personal loans and rent.
- Stable employment income: Borrowers must have a stable, ongoing job that provides an income high enough that the borrower can afford to repay the loan. Professionals in certain occupations (e.g. accountants, lawyers, doctors) are much more likely to be approved for a home loan with no deposit because are generally considered to be at a lower risk of losing their jobs.
- Common property type: Borrowers must be buying a standard type of property such as a house, townhouse, unit, or vacant land to build on.
- Common location: Almost all lenders require that borrowers must be buying in a capital city, major town or major regional centre (e.g. Wollongong, Newcastle, Coffs Harbour, Gold Coast, Sunshine Coast, Toowoomba, Ballarat, etc.).
How to get a home loan without a deposit
Some of the circumstances in which someone could buy a house without any deposit are having guarantor to co-sign the loan or obtaining the money for the deposit via a method other than saving or investing. Although it’s possible to obtain a 100% home loan, it may not be a good idea for most.
Examples of how to get a home loan without a deposit:
- First Home Owners Grant (FHOG)
- Guarantor provides deposit or co-signs loan
- Monetary gift
- Equity in another property
- Personal loan
- Buying through an SMSF
See here for more information on how to raise a deposit if you don’t have genuine savings.
The following table lists some of the options available for first-time buyers and the number of institutions who provide those options, based on Canstar research in 2016:
|Guarantor can provide deposit||27||47||74||36.49%||63.51%|
|FHOG counts as deposit||24||50||74||32.43%||67.76%|
|Monetary gift as a deposit||6||68||74||8.11%||91.89%|
Source: Canstar’s September 2016 Home Loans Star Ratings. Based on average variable interest rate and a loan of $350,000 taken over 25 years.
We’ve explained each of these options in more detail below.
Getting someone to go guarantor for you
One option for breaking into the property market is to ask your parents if they would be willing to provide the deposit or co-sign your loan as a home loan guarantor. In a parental guarantor home loan, borrowers may be able to borrow up to 100% of the property value.
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.
Be wary of loans that advertise “105% guarantor loans”, where you borrow more than the property purchase price without having any savings. These loans are designed so that borrowers can even borrow the upfront costs involved in buying a house (things like legal fees and stamp duty). In general, it is not a good idea to borrow more than the 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 negative equity and it is one reason why it is wise to avoid 105% LVR home loans.
First Home Owners Grant
First home buyers 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) here.
If you receive a large monetary gift or ‘windfall’ from something like an inheritance or the lottery, you may decide to put that towards a house deposit. Most traditional lenders require your deposit to be made of genuine savings – because it shows that you will be able to repay the loan – but a smaller number of lenders are willing to accept a deposit that comes from a gift or windfall. Using a monetary gift for your deposit may limit the options available for your home loan.
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 you already have a home loan on a property, you can use the equity on that loan as a deposit towards buying another property – if you can afford to repay two mortgages at once, that is.
Most lenders will allow a borrower to use up to 80% of the equity they hold in one property as a deposit to buy another property. If a borrower is willing to pay Lenders Mortgage Insurance (LMI), they may be able to find a lender that will allow them to use up to 95% of their equity.
Using a personal loan to fund your home loan deposit is technically possible 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 a personal loan and a mortgage and they have a good credit history.
However, most lenders require genuine savings, so they will not accept a deposit that comes from another lender. And while it may be possible to find a lender who will accept a personal loan as your deposit, your mortgage lender may charge you higher interest rates than they would a borrower who had genuine savings.
Buying through an SMSF
This is not a home loan with no deposit – but it is one way to avoid using your personal savings for a deposit. If you have more than $100,000 in an SMSF (self-managed super fund), you can borrow up to 80% of the purchase price, using some of your SMSF to cover the 20% deposit. You can only use an SMSF to buy an investment property – not a home to live in.
However, this route is not one to choose lightly, as you have to be willing to follow the complicated taxation rules involved in running an SMSF. For more information about property investment or running an SMSF, read our Canstar Guides on these topics.
Are home loans with no deposit a good idea?
In general, no. As with anything, of course, there are pros and cons to home loans with no deposit. There are a few main reasons why borrowers should avoid no deposit home loans in general, and should instead try to raise as large a deposit as they can.
Disadvantages of no deposit home loans
- Higher interest rates if you borrow more than 80% of the property purchase price.
- Restrictions on locations where you can buy property.
- Usually have to pay Lender’s Mortgage Insurance (LMI) with no deposit.
- Lengthy and difficult approval process for no deposit home loans, because of the need for credit checks on guarantor as well as the borrower.
- No deposit is not an option for self-employed borrowers.
- What if no one wants to be your guarantor?
- Loan approval is not just your lender’s decision – their insurance provider of LMI also needs to approve your mortgage application.
Benefits of home loans with no deposit
- Getting into the property market: For first home buyers who do not have much in savings, a home loan with no deposit gives them a way to buy in an unaffordable property market. Many people say this saves them from “wasting money on rent” or living with their parents for longer.
- No LMI: If you have a guarantor, you save money by not having to pay LMI despite having such a high LVR.
- Usually has standard loan features: No deposit home loans usually have most of the same features as other home loans, such as a redraw facility or offset account, and the ability to make extra repayments.
- No savings required: For property investors who have some equity in a property but hold less genuine savings in the bank, using equity for the deposit on an investment home loan can be a possible option. It’s worth pointing out that home loans with no savings are not generally designed for first home buyers. If a potential borrower is struggling to meet the costs of living to the point that they aren’t able to save any money towards a house deposit, it is not wise for them to apply for a home loan at that point in time.
- Beat the rise in property prices: In the time it would take to save up a sizeable deposit for a home, the property market may have risen significantly. In that sense, purchasing a home without a deposit may help the buyer ‘beat’ this rise in property prices and secure the home at a comparatively lower price.
How much deposit do you need to buy a house?
When buying a house it’s considered best to save up 20% of the purchase price before applying for a home loan. We’ve done the maths here about how much you might need to save for the deposit and other fees involved in buying a house.