How To Get a No Deposit Home Loan
As property prices soar, saving for a deposit has become all the more challenging, with some first home buyers needing up to 10 years to save an adequate deposit.
Is it possible to get a no deposit home loan?
No deposit home loans are not very common in Australia. However, it may be possible to qualify for a loan without paying any deposit through some lenders if you meet certain conditions, such as having a guarantor on your home loan. The other alternative is applying for a low deposit home loan, which is more commonly available than a no deposit home loan.
Here are a few options available to you if you want to buy a house but don’t have an adequate deposit saved up for it.
- Guarantor home loans
It’s possible to borrow money for a house without paying any deposit by asking your parents or siblings to guarantee your mortgage.
When you take out a guarantor home loan, the lender will take additional security over the guarantor’s property to cover their risk in lending you more than 80% of the new property’s value. If you default on the loan, the guarantor may become liable to cover your repayments. In some cases, when the guarantor cannot meet the repayments, the lender may take possession of your property and sell it to clear the loan. The lender may also possess the guarantor’s property if there’s a shortfall in the sale proceeds from your home.
- Low deposit loans
It’s possible to borrow up to 95% of a property’s purchase price if you have a stable income and excellent credit history. Some lenders allow you to borrow money with as little as a 5% deposit, but you may be required to pay for Lenders Mortgage Insurance (LMI).
LMI is a type of insurance that protects the lender if you default on your home loan. It is a one-off payment that can be rolled into your loan amount or paid upfront at the time of settlement.
How much will LMI cost depends upon the size of your loan and the percentage of the purchase price that you are borrowing. However, it may be possible for you to save on this money by asking for a professional discount if you are a doctor, lawyer, accountant, or someone working in a highly regarded profession.
- Gifted deposit home loans
If you are struggling to save up an adequate deposit, a timely gift from a family member could help. A gift refers to a sum of money offered by a family member to cover your deposit without requiring you to return the money to them.
It’s generally advisable to supplement a gifted deposit with some of your genuine savings to increase your chances of approval. You must also keep a paper trail to substantiate the gift, which could be in the form of a letter stating that the amount received by you is a gift and not a loan. You could check with a mortgage broker regarding the exact requirements to qualify for a home loan with a gifted deposit.
- Government grants and schemes
In addition to the First Home Owner Grant (FHOG) available in some Australian states and territories, there are some federal government-sponsored schemes to help first home buyers get into their homes sooner.
The First Home Loan Deposit Scheme (FHLDS) and The FHLDS New Home Guarantee are government-backed guarantees that allow eligible first home buyers to borrow money for a house with as little as a 5% deposit, and no requirement for LMI. There’s also the Family Home Guarantee that enables single parents with dependents to avail of a home loan with just a 2% deposit, without any LMI payment. However, limited places are available under these schemes, and income or price caps may apply. Visit the Support to buy a home page on NHFIC.gov.au for the latest updates and eligibility criteria.
When using any of these government-backed guarantees, it’s essential to understand the difference between a grant and a guarantee. A government grant, like the FHOG, is a fixed amount given to you by the government to help you purchase your first house. On the other hand, a government guarantee is just a guarantee that allows you to borrow a larger percentage of the property’s value. However, you are required to pay back the amount you borrow as part of your mortgage, generally within a period of 30 years or less. Therefore, it’s important to check whether you can afford the higher repayments or not when borrowing with a low deposit to avoid stretching yourself too thin and risking a payment default in future.
If you are confused about the right loan type for you, it could help to speak with a broker or Opulent Finance expert for their opinion.