For many people, buying a home is part of the great Australian dream. Yet with the high cost of living – particular in our capital cities – saving for a deposit can be extremely difficult. Pre-GFC days, you might have found a lender who would grant you a deposit for 100% of the value of the property. But, unless you have a guarantor, these days getting approval for a no-deposit loan is unlikely.
You can, however, still secure a loan with a small deposit or even no deposit at all.
Can I get a home loan with no deposit?
Yes, you can, but you will need a guarantor. Most people who get no deposit loans are first home buyers who will live in the homes they purchase. Most lenders prefer these types of buyers as they usually pay their loans on time. To get the loan approved, however, you will need a guarantor.
A guarantor is someone with an existing property, who is legally responsible for paying back the entire loan if the borrower cannot or will not make the loan repayments and will also have to pay any fees, charges and interest. A parent may act as a guarantor to first-time buyers seeking help getting a home loan. The guarantor can use their property as security so long as the value of the security is great enough that the loan’s LVR is 80% or lower. In other words, the guarantor has to have a certain amount of equity in their property, which acts as a security against the loan in case you can’t meet or make your payment obligations under the loan contract.
When applying for a home loan, investors can also secure no deposit loans with a guarantor, although they are really designed for first home buyers trying to crack the property market.
Some banks also offer 105% loans as long as you have a parent who can act as guarantor. The extra 5% is for additional costs such as stamp duty on top of the loan amount.
Buyers can remove the guarantor as they pay off the loan or the property increases in value.
Benefits of guarantor loans for borrowers
Guarantor loans help borrowers get home loans without a deposit or the need for Lenders Mortgage Insurance (LMI). Both investors and homeowners usually enjoy lower interest rates. Better yet, the 105% loan covers your stamp duty and other costs.
Getting a low interest rate
Not all lenders offer 90%+ home loans, but those that do often offer great interest rates. This is because they are actively looking to work with the no deposit market segment.
Having a guarantor also means you won’t have to pay the LMI premium.
Benefits of guarantor loans for guarantors
It’s not just borrowers that benefit from guarantor loans. For one, guarantors enjoy security as they don’t need to concern themselves with anything beyond their fixed liability. They also have choices in how they secure the guarantee. Securing with a term deposit or property should do the job.
Finally, the guarantor does not have to tie themselves in for the duration of the home loan. Once the borrower has paid off a certain amount of the loan, the guarantor can be removed. This generally happens once the borrower has paid off more than 20% of the loan.
How much deposit do I need to buy a house as a first time buyer?
There is no magic number when it comes to a deposit, however in Australia the majority of lenders require you to have saved 10% of the property’s value (a couple of lenders may only require 5%). This means if you’re looking to buy a house with a value of $800,000, you’ll need a deposit somewhere between $40,000 and $80,000.
A rule of thumb is, the smaller your deposit, the more rigid the regulations are on it. If you’ve only got a 5% deposit it has to be genuine savings. if you’ve got 10% or more, a gift (from a parent, for example) can be part of it.
Can you get a home loan with 5% deposit?
Yes, you can get a home loan with only a 5% deposit, although how much you can borrow will differ depending on the lender. Generally speaking, you’ll need at least 5% of the purchase price to get approval for a loan. If you only have a 5% deposit, be aware that this needs to comprise “genuine” savings – i.e. it’s not dependent on your brother selling his car, or a loan from a friend. These are the things that make lenders nervous. Your deposit will affect how much you are able to borrow from your lender. Please keep in mind that money from a parent or third party is known as a gift and not considered genuine savings.
Read: can I get a home loan with a 5% deposit? for more information.
How can I save money fast?
There are many ways you can save for a home loan. One way to increase your borrowing power is to pay off any debt or potential debt you have, in the form of credit cards, personal loans or car loans. The more debt you have to pay off, the greater risk you pose as a customer. Even if you don’t owe anything on your credit card, a percentage of your limits will be considered debt.
Use uno’s calculator to work out how much you can borrow.
How do I get a downpayment on a house?
Aside from saving, there are other ways to accrue the money you need to buy a house, with no deposit, including:
Using a gift from mum and dad
We don’t mean your parents buy the property for you (although wouldn’t that be nice!) Rather, your parents pay for the deposit. A gift of between 5 and 15% of the home’s value will set you on your way.
In May 2017, the Australian Government announced that from 1 July 2018 individuals will be able to apply to withdraw voluntary contributions made to super after 1 July 2017 for a first home deposit. Legislation cleared the Senate in December, paving the way for more first home buyers to crack the market in 2018.
Can you use the first home owners grant as a deposit?
The First Home Owner Grant (FHOG) scheme was introduced on 1 July 2000 to offset the effect of the GST on home ownership. It is a national scheme funded by the states and territories and administered under their own legislation.
Under the scheme, a one-off grant is payable to first home owners that satisfy all the eligibility criteria and in many cases can be put toward your deposit. A uno home loan expert can speak to your lender about whether you’re eligible. Some lenders will be able to process the grant on your behalf if you decide to apply for a loan.
The approval process
When it comes to getting approval for a no deposit home loan, you’ll have to meet fairly strict guidelines.
Your record should show on-time payment for everything, specifically rent, credit cards, and other types of finance. It’s important that you don’t fall behind on any of your payments.
- Credit history
In order to get approval for a no deposit home loan, your credit history must be immaculate. Anything less than a perfect score will damage your chances of getting a no deposit home loan.
- Employment and income
Full-time, stable employment is a must. Changing jobs often creates uncertainty. You should also earn enough to show that paying off the loan is achievable. Your profession may also impact the approval process: a low-risk profession, such as accounting or teaching, may increase your chances of approval.
- Location and type
When it comes to getting a no deposit home loan, rural areas are generally off limits. Most lenders won’t consider loans if the property is not in a city or town and houses, apartments and vacant land are generally safe options. You can secure a no deposit construction loan if you are building a property, have a guarantor, and are a first-time buyer, however you’ll need about $5,000 in savings to cover the costs of going over your construction budget.
Read: first home owners grant eligibility for more information.
What else do I need to know?
That covers the general information about no deposit home loans and some of the key questions. Now let’s dig into some other questions that may be on your mind.
- Is it better to save for a deposit than take the no deposit route?
As a general rule, you will achieve a better financial outcome with a guarantor loan when buying in a growth area, rather than waiting to save for a deposit. If that isn’t an option, then pay the LMI and shoot for a 95% loan. In both cases, you can save thousands of dollars you would have lost due to capital gains. It helps to speak to a real estate agent to find out about current market trends.
Of course, the flipside is that saving a deposit is usually better for stable and declining areas. Talk to a uno expert to find out more.
- Do no deposit home loans have fewer features than other home loans?
With a no deposit home loan, you usually have access to the same features you’d have with other home loans, such as fixed rate options, offset accounts and the ability to make extra repayments. You may also have access to flexible payment packages, interest only payments, and waived fees.
- Do no deposit home loans have higher interest rates?
Surprisingly, you’ll find no deposit loans can often come with low interest rates. The key is finding a lender that wants to lend to borrowers seeking no deposit loans. Not all lenders fit the bill, so work with a professional to narrow your search.
- What is LMI?
We’ve mentioned LMI a couple of times already, so a little more detail is needed. LMI is a one-time form of insurance. Its purpose is to protect lenders if borrowers default.
The fee is charged on loans for over 80% of a home’s value, making LMI a concern for all no deposit loans. As for rates, they vary depending on the lender. Generally, LMI on loans above $500,000 reaches about 4% of the home’s value. This falls for loans of $300,000 or less.
LMI eats into the percentage of a home’s value that your loan covers. Say you have a 95% loan. After paying off LMI, you get left with between 92 and 94%. Some lenders allow you to capitalise the LMI so you can use the entire 95% of the loan. It all depends on the lender’s policy.
- Can I avoid LMI?
Several new types of loan help you avoid LMI and still borrow 100% of the value of your home. Again, it comes down to the guarantor. If your parents are on board you can get the fee waived, though not all lenders offer the service. The 105% loans we mentioned at the top of the page are typical of this arrangement.
You may also avoid LMI if you save a deposit. Lenders will take other factors into account, such as your job and the risk attached to your application. If all of that checks out, you could secure a 90% loan with no LMI. You wouldn’t need a guarantor in this case, but you will spend more time saving the deposit.
uno works with 22 different lenders, from the big four banks to smaller lenders offering rate packages to suit your needs. Chat to one of uno’s advisers about what you’re looking for and we can work to find the right lender – and rate – for your needs.
With Hannah Tattersall