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One of the most challenging parts of buying a house is saving for the deposit. But did you know there is an option for a no deposit home loan? While it may sound too good to be true, a no deposit home loan is a thing and has helped many to purchase a property. However, although there are legitimate circumstances for no deposit home loans, low deposit home loans are much more common. In this blog, we’ll look at no deposit home loans and how you can purchase your dream property sooner. What is a no deposit home loan?
A no deposit home loan refers to a purchase where - you guessed it! - no deposit is required. While this might sound too good to be true, there are a few ways to avoid the struggle of saving for a deposit. When you hear the term no deposit home loan, it often refers to a guarantor loan. A guarantor loan is when someone can help you secure a home loan by agreeing to offer their own property as additional security for your loan. While there aren’t many other ways to get into the property market without a deposit, using equity in another property or a gifted deposit are some other things to consider.How do they differ from traditional home loans?
No deposit home loans differ from traditional ones as they don’t require a deposit. While purchasing a property without a deposit is achievable, it’s much more common to buy using a low deposit option. Here is a brief example (current as of November 2023) of what no deposit and low deposit home loan options are available:- Borrow up to 105% of the property value with a guarantor (usually your parents' home; the property must be in Australia).
- Borrow up to 100% using equity in another property.
- Borrow up to 95% with the First Home Guarantee.
- Borrow up to 95% with a gift as a deposit.
- Borrow up to 95% with a personal loan as a deposit (low-risk borrowers only).
- Borrow up to 95% under a shared equity scheme.
Benefits of no deposit home loans:
There are a few significant benefits when it comes to no deposit home loans. These include:No need for a large upfront deposit
The most obvious benefit of a no deposit home loan is that you do not need to save a chunk of money to use as a deposit. This means you can focus on saving your cash for the hidden costs of buying a home, like stamp duty and lender’s mortgage insurance.Sooner entry into the property market
For first-home buyers especially, the deposit often rules them out of buying a property. If they don’t have to pay the deposit, they can get into the market sooner than they would otherwise.Potential for capital gains
As with any real estate transaction, there is the potential for capital gains when selling the property. A capital gain is calculated by taking the capital proceeds you receive less the cost base of your property. This includes the amount the property was sold for.
Drawbacks of no deposit home loans:
Like with any financial decision, there are some drawbacks to purchasing a no deposit home loan. These include:Higher interest rates
Depending on your lender, some may charge a higher interest rate if you borrow more than 80 per cent of the property’s price. Generally, the more you borrow, the more interest you’ll pay over the life of the loan.Lenders Mortgage Insurance (LMI) costs
If your deposit is under 20 per cent, most lenders will charge you lenders mortgage insurance (LMI). This is something you’ll need to factor into your budget when purchasing a property.Risk of overborrowing
Lastly, when it comes to no deposit home loans, there is the risk of overborrowing. Without a deposit to limit the size of the loan, there can be the temptation to borrow more than you’re financially comfortable with, which can lead to future financial strain.Eligibility and qualification requirements:
When it comes to the eligibility and qualification requirements of a no deposit home loan, an Inovayt mortgage broker can help you through the process step by step. Some of the criteria that will be considered are:- Income and credit score considerations - For home loans without a deposit, you generally need to have a high enough income to service the loan. Having a high credit score is also important.
- Guarantor options - If you want to purchase with a guarantor, their financial situation will be thoroughly analysed. Your guarantor must have enough equity in their home to cover the guarantee, typically must be working (not many lenders consider retired guarantors), and the property must be in Australia.
- First-home owner grants and other government incentives - Lastly, an Inovayt mortgage broker will search for any government grants or incentives you may be eligible for when looking to purchase a no deposit home loan.
Tips for securing a no deposit home loan
When securing a no deposit home loan, there are a few considerations to consider to prepare and increase your chance of success.- Steps to increase your chances of approval - First things first, speak to an Inovayt mortgage broker. With years of experience in the industry, they can offer you the best advice on how to get approved for a no deposit home loan.
- Budgeting and financial planning - Another thing your Inovayt broker can assist with is financial planning and setting up a budget. This will help you to understand where your money is coming in from and where it’s going.
- Finding a suitable lender - Lastly, your Inovayt mortgage broker will find you a suitable lender. They have access to a variety of lenders and offers that aren’t always available to the public. Our brokers also act as the point of contact between you and the lender, meaning you don’t need to get involved with any of the complex financial discussions
