What is a no-deposit home loan?
A no-deposit home loan, also known as a 100% loan-to-value ratio (LVR) home loan, is one that allows a person to borrow the full purchase price of a home.
No-deposit home loans are generally rare, but there are ways a buyer can negate the need to save a deposit before buying a property.
Can you get a home loan without a deposit?
Yes, it is possible to get a no-deposit home loan if you meet certain criteria. There are generally two ways you can secure a no-deposit home loan:
- Having someone act as a guarantor on the loan
- Using equity in a property you already own.
Some specialty lenders do allow homebuyers to purchase a place with no deposit, either essentially offering you a secondary ‘deposit loan’ or allowing you to buy an off-the-plan property and build the deposit as it’s built. In both cases, significant fees and extra interest charges will likely apply. While it’s not common for lenders to offer home loans with absolutely no deposit requirements, many offer low-deposit home loans with minimum LVR requirements of 95% if the borrower meets other criteria.
This means the borrower needs a deposit of 5% of the purchase price, and will likely need to pay for Lenders Mortgage Insurance (LMI). However, the 5% Deposit Scheme can waive the need for LMI.
Even if you don’t need a home loan deposit, there are other upfront costs involved in buying a home, such as:
- Stamp duty
- Conveyancing or solicitor fees
- Building and pest inspections
- Mortgage fees
Do you need a deposit if you have a home loan guarantor?
If you don’t have a deposit, a parent or family member may be able to help you out by becoming a guarantor on your home loan. By using the equity in their own property to help secure your loan, you may be able to borrow 100% of your property’s value, and sometimes even up to 105%.
To qualify, the guarantor generally must own a home and have built up enough home equity, or have another asset to put down as security, like cash in a term deposit. They’ll also need to show they can afford to cover the loan if you can’t.
This can help effectively reduce your loan-to-value ratio to 80%, which may mean you can avoid paying LMI. While having a home loan guarantor can help you to enter the property market, the guarantor is legally responsible for the guaranteed amount if you’re unable to meet repayments. In the worst-case scenario, a guarantor could be at risk of having their own home repossessed.
It’s important to weigh the risks and understand the responsibilities involved for both you and the potential guarantor.
Using equity in a property you already own as a deposit
If you already own a property and it’s worth more than you owe on any home loan attached to it, you likely have what’s known as ‘home equity’.
You may be able to use some of the equity in that home as a deposit towards another property, provided you can afford both loans concurrently.
The downside here is that you’re increasing your total debt, which can put a significant strain on your finances. And if you fall behind on your repayments, you risk losing both properties.
Additionally, if the value of one or both properties falls, you could also be at risk of falling into negative equity.
Who is eligible for a no-deposit home loan?
Depending on your approach to a no-deposit home loans, you might find lenders apply stricter criteria, such as:
- A higher credit score
- Stable employment or income
- A specific situation
For instance, some specialist lenders might offer no-deposit home loans exclusively to first home buyers or owner-occupiers.
However, if you have a guarantor or you’re using existing home equity as a deposit, you’ll likely be subject to standard home loan eligibility criteria.
What are your low-deposit home loan options?
Looking beyond no-deposit home loans, there may be support to boost your deposit or help you get into the market with a smaller savings pool.
These include:
- First Home Owners Grants (FHOGs)
First home buyers may be eligible for a First Home Owners Grant from their state government if they meet certain requirements. These grants can often be put towards a home loan deposit. - The 5% Deposit Scheme
The 5% Deposit Scheme can see the government essentially acting as guarantor on eligible buyers’ home loans, reducing the deposit needed to avoid LMI. It’s open to first home buyers and single parents. - A gifted home deposit
If you have access to the ‘Bank of Mum and Dad’, you might be able use that as a home loan deposit. It’s worth noting that some lenders will ask that at least a portion of your deposit consists of ‘genuine savings’ you’ve accumulated over time.
Is it a good idea to get a home loan with no deposit?
There may be benefits and drawbacks to taking out a home loan without a deposit. Here are a few key ones:
Possible benefits of home loans with no deposit
- Might be able to enter the market sooner
A home loan with no deposit requirements may help first home buyers buy a home sooner, rather than waiting until they have substantial savings. This can be especially tempting in a rising property market. - Help grow a property investment portfolio
Property investors could use equity in an existing property as the deposit on another investment home loan, which could help grow their portfolio without tying up extra cash.
Possible disadvantages of no deposit home loans
- Higher interest costs
Some lenders charge higher interest rates if you borrow more than 80% of the property purchase price. Plus, the more you borrow, the more interest you’ll have to pay over the life of the loan. - More paperwork and longer application wait times
Having a guarantor or using equity as security can complicate the home loan application process and may even make it more expensive, as lenders might demand property valuations on homes owned by either yourself or your guarantor. - Risk of negative equity
If the value of your property decreases before you’ve built substantial equity, you may end up owing more than it is worth. - Smaller pool of lenders to choose from
No deposit home loans are not very common, and not all lenders offer them.
