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No-Deposit Home Loans

No-deposit home loans are an option offered by some home loan lenders in the Australian market, but not all. They allow approved applicants to borrow 100% of the purchase price of a property without any deposit, subject to them meeting strict lending criteria.

A few lenders may even be prepared to provide up to 105% of the value of a home to help a borrower cover additional purchase costs (such as stamp duty and legal fees).

Can I get a home loan with no deposit?

The policies of lenders that offer no-deposit home loans vary. However, they will generally only approve applicants who:

  • Have a perfect credit rating. Lenders can research a borrower’s credit repayment history through credit reporting agencies such as Equifax or Dun & Bradstreet.
  • Are buying a standard type of property in a desirable location.

These criteria help no-deposit home loan providers to meet the responsible lending provisions of the National Consumer Credit Protection Act.

Lenders will also require applicants to demonstrate that they have sufficient stable employment income to meet their regular repayments, just as they would with any type of finance.

How to get a home loan without a deposit

Applicants can improve their chances of approval by:

  • Having a guarantor. A guarantor agrees to be legally liable for repayments if the borrower defaults.
  • Accessing a First Home Owners Grant (if they are eligible).
  • Using the equity (ownership) that they already have in another property.

Getting someone to go guarantor for you

Guarantors are often family members, such as parents for their adult children who are entering the property market with their first property. However, a guarantor arrangement should not be entered into lightly, because it can fracture relationships in a worst-case scenario (i.e. if the borrower defaults on their repayments). Both the borrower and the guarantor must be fully aware of their obligations before they commit to this type of arrangement.

One way for a borrower to reduce the long-term obligation of their guarantor is for them to negotiate a provision in the loan documentation for the guarantor to be removed once the loan-to-value ratio (LVR) falls below a certain level (for example, 80%). The LVR is the outstanding balance expressed as a percentage of the value of the property. For example, a home valued at $600,000 would have an LVR ratio lower than 80% once the balance owing fell below $480,000 (i.e. 80% x $600,000). The LVR will decrease over time via borrowers making their regular repayments and/or their property increasing in value.

First Home Owners Grant (FHOG)

First Home Owners Grants are one-off grants offered by all Australian States and Territories to eligible first home buyers. Eligibility criteria and the amount provided to approved applicants varies between different locations. The FHOG can potentially be used by borrowers as an alternative to saving for deposit.

Using equity in a property you already own

The equity (ownership) that a borrower may have in another property (or properties) can be used instead of a deposit for a no-deposit home loan. The equity provides collateral security for the lender. Collateral security is an asset that a lender can seize to repay an outstanding debt if the borrower defaults. A borrower that can provide this collateral security therefore reduces the lender’s risk of approving the funds.

Are home loans with no deposit a good idea?

No-deposit home loans have a higher level of risk for both borrowers and lenders. Borrowers need to be aware of their disadvantages as well as the benefits they can provide. In general, borrowers will be better off with other types of home loan products (if they are eligible).

The disadvantages:

The potential disadvantages of a no-deposit home loan include:

  • Stricter approval criteria for applicants (for example, they usually require the borrower to have a guarantor and the application process if usually more time- consuming).
  • They may have a higher interest rate to compensate the lender for the increased risk.
  • There are likely to be restrictions on where the property may be located.
  • A borrower can potentially owe more than their property is worth if market values fall.
  • Self-employed people are unlikely to be eligible.

The advantages:

The benefits of home loans with no deposit:

  • They can help borrowers to enter the property market sooner.
  • They can help investors to expand their property portfolio by using the equity they already have in an existing property (or properties).
  • A guarantor may remove the need for lender’s mortgage insurance (LMI). LMI protects the lender against repayment default. In the absence of a guarantor or some other collateral security, LMI is usually required on loans with LVRs greater than 80%.

What are my other options?

There are alternatives to a no-deposit home loan that don’t require the standard 20% deposit required by many home loan products. These alternatives include low-deposit loans (with an LVR up to 95%), home loans with 5% deposit, or home loans with a self-managed super fund (SMSF).

A low-deposit home loan

Low deposit loans may still require a borrower to have a guarantor and/or to have LMI. However, a borrower starts off with at least some equity in their property, and their ability to save for a deposit demonstrates to the lender that they can budget effectively to help them with their future repayments.

A home loan with 5% deposit

These types of loans are similar to the low-deposit home loans described above. However, more lenders offer 5% home loans than no-deposit home loans, so borrowers that can save this minimal deposit level have an increased range of lenders to choose from.

A home loan with a self-managed super fund

Borrowers in SMSFs can use some of these funds as an alternative to using their savings for a deposit. However, these funds can only be used for an investment property, not for a residential home. There are also strict rules regarding how any borrowing using an SMSF needs to be set up. Borrowers considering using their SMSF in this way should seek professional accounting and legal advice before making any decision.

The bottom line

No-deposit home loans have higher potential levels of risk than other types of loan products in the market. Taking out any home loan is a major financial decision. It is worthwhile for borrowers to seek professional advice to identify the most appropriate option for their individual financial circumstances.

If you’re interested in a no deposit home loan book an appointment to speak with one of our home loan specialists. Or start to compare home loans online.