The Ins and Outs of No Deposit Home Loans
If you haven’t saved enough money for a deposit, before you decide that property ownership is out of your reach, you should know that the days of no deposit home buying are not gone. While you may not be able to secure a 100% loan, you might still be able to buy a property without a deposit.
Who Can Do It?
Most people who get no deposit loans are first-time buyers who will live in the homes they purchase. Most lenders prefer these types of buyers as they usually pay their loans on time. Still, a guarantor is usually needed to get the loan approved.
Investors can also secure no deposit loans but they have to meet more conditions. A guarantor is needed and the bank must feel certain that the investor does not pose too high a risk. First-time investors tend to have it a little easier. Even so, it is more common for investors to shoot towards a 95% loan, rather than 100%.
How Can You Do It?
There are a few ways you can secure a no deposit loan. These are the four most common:
• 105% Guarantor Home Loans
With the right people by your side, such as your parents, you can secure a bigger loan than you initially thought. That means you may be able to borrow as much as you need without paying a deposit.
Does that sound too good to be true? It isn’t! You will find that some banks offer 105% loans as long as you have a parent who is able to help. You can even remove the guarantor later on as you pay off the loan or the property increases in value.
So you don’t always have to struggle with saving a deposit if your parents can step in for you.
• Use Existing Equity
You can use another property to secure a home loan. The equity that you have built up can go towards the new loan.
With enough equity, you won’t have to pay a cent towards a deposit. You can even find out how much equity you can borrow against with an online calculator.
You may find that one of your properties will make it easier to secure a home loan for another property.
• A Gift from Mum and Dad
We don’t mean that your parents buy the property for you. However, your parents could give you the money you need for a deposit. A gift of between 5% and 15% of the home’s value will set you on your way.
Most lenders will consider you, even if you didn’t save anything towards the deposit.
As long as the lender is happy about you not saving the deposit yourself, you can find no deposit home loans.
• Using Superannuation
Did you know that if you have more than $150,000 in a self-managed superannuation fund (SMSF) you can use that to cover your deposit?
By leveraging the money in the SMSF you can jump straight into the buying process without having any savings. In these situations, banks will usually lend up to 80% of the home’s value.
The downside is that this is a complex route. Do not move forward before you talk to an expert. With proper planning, you can eliminate the need for a deposit and make use of your superannuation.
How Guarantor Loans Work for You
That makes four ways you could buy a home without a deposit. Most borrowers with no deposit tend to favour guarantor loans as they come with fewer restrictions. Approval is less strict and these type of loans are not as liable to suffer due to policy changes. Of course, if your parents’ property is not in Australia, you will have to consider other options.
• 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.
• 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 over 20% of the loan.
What If These Tactics Aren’t An Option?
The days of pure 100% home loans have gone. So, if none of the above works for you then you will need to save a deposit.
There are some steps you can take. A pre-loan preparation plan will get you started. Show your commitment by saving 5% of the home’s value in a bank account under your own name.
From there you need to show lenders some stability to secure loans close to the 100% mark. Keep making regular payments of your bills to show your trustworthiness. Also, avoid changing your job. A new job shows instability, even if you are earning more. It’s not a deal breaker, but it can delay things.
Getting a Low Interest Rate
If you go the guarantor route you can save quite a lot in interest. Though not all lenders offer 90%+ home loans, those that do tend to offer great interest rates. This is because they are actively looking to work with no deposit market segment.
It all comes down to research. Look at the loan and focus on banks that want to lend over 90% of a home’s value. You can also work with a mortgage broker to negotiate lower rates.
As a final tip, guarantors help here too as you won’t have to pay the LMI premium. That’s even more money saved.
You may find getting approval for a no deposit home loan quite difficult. You have to meet fairly strict guidelines, such as the following:
You cannot fall behind on any of your debts. Your record should show on-time payment for everything. Rent, credit cards, and other types of finance fall into this requirement.
• Credit History
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 the loan won’t give you any trouble. Your profession may help too. A low-risk profession, such as accounting or teaching, may up your chances of approval.
• Location and Type
Most lenders won’t consider any deposit loans if the property is not in a city or town. Rural areas are generally off limits. Ideally, the home itself will also be normal. The more unusual the property, the less likely you are to gain approval. Houses, vacant land, and units are the way to go.
Do Savings Help?
Having existing savings will help you secure a no deposit home loan. Still, savings aren’t essential if you have a guarantor on board.
Let’s assume for a moment that you don’t have a guarantor. The savings you will need differ depending on your circumstances.
• First-Time Buyer
First-time buyers have it a little easier than most. Thanks to the First Home Owners Grant (FHOG), a new buyer can cover a lot of the upfront costs of buying a home. If the FHOG covers the deposit, no savings are needed even without a guarantor.
• Second Home Buyers
This is where it starts getting tricky. Without a guarantor, a second-time buyer will need about 5% of the home’s value saved to cover professional services and stamp duty. A family gift can help in this situation, though not all lenders accept this.
• Building a Home
You can secure a no deposit construction loan if you are building a property, have a guarantor, and are a first-time buyer. Keep about $5,000 in savings to cover the costs of going over your budget on construction, though.
Without a guarantor, an investor needs to save 9% of the property’s value. Only 5% of that actually goes to the deposit. The rest covers stamp duty and the rest of the costs related to buying the home.
Can I Get A No Deposit Loan Anywhere?
It really depends on the lender. As a general rule, banks do have some location restrictions. They prefer borrowers to buy homes in major regional hubs and cities. So, if you’re buying in Sydney or Canberra, for example, you usually won’t have a problem.
Things get more difficult as you go down the regional scale. Lenders shy away from small towns and rural areas a little more. Still, with the right advice, you can secure a no deposit loan for practically any location.
What about Debt Consolidation?
It is possible to consolidate existing debts, including credit cards and loans, into a no deposit home loan. A guarantor is essential if you go this route. Most lenders will not consider debt consolidation without a guarantor offering security.
You should talk to an expert if you want to take this option. Consolidation complicates things and professional advice is needed to get it right.
Frequently Asked Questions
So, 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 Saving a Deposit Better Than the No Deposit Option?
Australia’s property market breaks down into a lot of segments. Your best choice will depend on which segment the home you want to buy falls into.
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 an expert to find out more. You can also use an online tool to see whether an area is growing or declining.
• Do No Deposit Loans Come With Fewer Features?
No, you usually have access to the same features you’d have with other home loans. Fixed rates, offset accounts and the ability to make additional repayments are often included. You may also have access to flexible payment packages, interest only payments, and waived fees.
The major thing to note is that line of credit loans don’t allow for no deposit financing. You can switch loans as needed once you remove the guarantee from the no deposit loan.
Work with a mortgage broker to find out more about the features that are right for you.
• Are Interest Rates High?
Surprisingly, you’ll find no deposit loans can often come with low interest rates. You’ll need a guarantor to access these lower 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.
• What Are the Drawbacks?
There are a few cons attached to no deposit loans. If you have already saved some money or you earn a lot you may find it easier to proceed with other types of home loans. You should also consider the following before choosing a no deposit loan:
• Borrowing more means higher mortgage payments.
• You need to meet tougher conditions than those who save deposits.
• Some no deposit loans come with high interest rates, though this depends on the lender.
• Not all no deposit loans cover additional fees so it’s wise to still have some money ready.
• Investors should be wary. Using no deposit loans for investing is complex and can alter your mortgage exposure limit. Speak to a professional to find out more.
Your Next Step
Hopefully, you now understand a little more about no deposit loans. Keep in mind that all of the information here is general. Your personal circumstances may affect your efforts to secure a no deposit loan.
If you’re interested in applying, seek out a professional like a home loan adviser from uno home loans. Get some help to understand your current status. Once you know more you can start exploring your options in more detail.