No Deposit Home Loans – do they exist?
Buying your home without a deposit seems like an unreachable dream — but does a ‘no deposit’ loan actually exist? No Deposit Home Loans may still be available for limited circumstances. Typically, you can still fund the purchase of your home with no deposit if you have one of the following:
- Guarantor based in Australia who can offer a property as security – this can be a family member willing to co-sign your home loan as a guarantor. If your parents decide to be your guarantor, they will need to provide documentation for proof that they could repay your loan in case you fail to meet the repayments. They will also be liable for the loan repayments if you miss a repayment.
- Equity in an existing property – the difference between the current worth of your property vs how much you still owe on the property’s home loan. If your property is now worth more than what you still owe on its home loan, this is regarded as positive equity. You can use some of that positive equity as a deposit towards another property. However, you need to be sure you can afford to repay both mortgages at once.
Generally, most lenders do not offer No Deposit Home Loans if you do not have a Guarantor or Equity in an existing property. Alternatively, if your parents own a home, they could be your guarantor if they are willing to guarantee part of your deposit. Your guarantor doesn’t need to pay anything. If their guarantee is worth more than 20% of your property’s value, there’s a possibility you could avoid paying lenders mortgage insurance.
But you can still finance the purchase of your home with a relatively small deposit. Lenders typically require a 5% deposit so if you are buying a property for $400,000 this would be $20,000. It is important to note that lenders have a rule called genuine savings and this means that you must save this deposit at least over 3 months.
What is the minimum deposit?
With a 5% deposit Lenders Mortgage Insurance (LMI) will apply. LMI is a one-off fee charged by the bank in the unlikely event you default. LMI protects the bank and not your interests.
LMI can be added to the loan or paid up front.
Do not forget you need to also cover Government fees and charges when buying a property.
Lending Criteria for No or Low Deposit Home Loans
When looking at an application for a no-deposit home loan, lenders tend to have very strict criteria. Requirements for no-deposit borrowers include:
- High credit rating: Borrowers must have a high credit rating with the main credit reporting agencies (Equifax, Dun&Bradstreet, Experian). Responsible lending requirements mean lenders will make no exception regarding this requirement.
- Impeccable repayment history: All debts and responsibilities such as credit cards, personal loans and rent must be paid on time.
- Stable employment income: A stable job for at least 12 months is required with regular income.
How to apply for a no deposit loan as a first homebuyer
If you have a small deposit, it is advisable to seek the help of an expert, such as your local independent mortgage broker. Your mortgage broker will guide you throughout the finance process, helping you understand the conditions you have to meet that different lender may impose for home loans with no deposit.
Can I use the FHOG as my deposit?
Absolutely! The First Home Owner Grant (FHOG) can typically form at least a part of your deposit. Keep in mind that you will still need money for other upfront costs, such as moving expenses and legal fees.
If you are buying a new home or one that has been renovated extensively, the FHOG is normally paid on settlement. If you are building a new home, the grant will likely be given to you when you make the first progress payment on your loan.
What about a monetary gift?
If you receive a ‘windfall’ from something such as the lottery or an inheritance, or a large monetary gift from your parents, you can put that towards a house deposit. While lending requirements differ, these may be accepted by some banks. For instance, you may be required to submit a ‘gift letter,’ which says the monetary gift is unconditional and non-refundable. In other words, there’s no expectation that the money will be repaid. But keep in mind that some banks only accept deposits made up of genuine savings. They won’t accept funds you didn’t build up yourself.
Are No Deposit Home Loans a good idea?
While there are definitely advantages to no deposit home loans, there also a few reasons why some people avoid it and opt to raise as large a deposit as they can.
Let’s take a look at the pros and cons.
Benefits of a no deposit home loan
- A no deposit home loan provides first home buyers with small amounts of savings a way to enter the property market. However, no savings home loans are generally not designed for first home buyers.
- Property investors with less genuine savings in the bank but with positive equity can use the equity as a deposit for an investment home loan.
- The property market can significantly rise in the time it takes to save up a sizable home deposit. In that sense, purchasing a home with no deposit can help you buy prior to the rise in property prices and secure the home at a comparatively lower price.
Downsides of no deposit home loans
- If you borrow more than 80% of the property purchase price, some lenders tend to charge higher interest rates. Additionally, the more you borrow, the more interest you will have to pay the lender over your loan’s term.
- If you pay a deposit that’s less than 20%, you will usually have to pay LMI. There is also a chance that the LMI provider will not agree to insure the loan, even if it has approval from the lender. In this case, your lender might withdraw your loan’s approval.
- Due to the need for additional credit checks and assurance that a guarantor is applicable, no deposit home loans often have a length and difficult approval process.
How do I start my home buying journey?
Lending requirements are always changing and it is important you discuss your needs with your mortgage broker. Contact What If We Finance today to find out more. As a top mortgage broker in Melbourne, we have the experience and the expertise to negotiate with lenders and help you find an unbeatable deal.