With housing prices at an all-time high, and lenders less willing to sign off on loans, the dream of home ownership can often feel out of reach for many young Australians.
According to the Perceptions of Housing Affordability Report 2019:
Increasingly fewer young Australians feel confident in their ability to enter the housing market.
41% of households earning less than $50,000 a year noted that they would be unable to raise more than a 10% home deposit, with 31% feeling unable to raise more than 5%.
While many are resigning themselves to a lifetime in the rental market, there are still plenty of options available if you have little or no deposit.
What is a no deposit home loan?
For many, the idea of a ‘no deposit home loan’ means a traditional lender providing you the entirety of your mortgage. However, it is incredibly rare for lenders to allow such loans without collateral, regardless of your income or credit rating.
Instead, there are other options that allow borrowers to successfully apply for a home loan without saving for a significant deposit first. These can include low deposit home loans, guarantor loans, and financial windfall.
Low deposit home loans
Low deposit home loans — also known as loan to value ratio (LVR) loans — is where you can get a loan with less than a 20% deposit. However, lenders will often require a stricter criteria including a high credit score, responsible repayment history, and stable income. Keep in mind that you may also have to pay for lenders mortgage insurance (LMI) if your deposit is less than 20%.
The most well-known type of a ‘no deposit home loan’ is a guarantor loan. A guarantor loan requires somebody — often a family member — to use the equity on their own home or similar asset as collateral to secure your home loan. However, if you are in the market for a second property, you can use your own home as collateral instead of asking someone else to do so. There are two types of guarantor loans — traditional guarantor loans and family guarantee loans. We give a rundown of each below:
Traditional guarantor loans
In a traditional guarantor loan, the whole of your guarantor’s property is used as collateral. While this can seem like the most accessible no deposit option, unexpected changes in your relationship or finances can have long-reaching repercussions. Should you default on payments for any reason, it can become the guarantor’s responsibility to meet them, and they can be expected to pay your loan in full if you cannot. Clearly, this is a sizable risk for your guarantor. As such, many lenders have created family guarantee loans to minimise the risk to your family.
Family guarantee loans
As the name suggests, family guarantee loans can only be undertaken by close relatives. These loans allow more freedom and security for the guarantor, with their home providing equity only to a negotiated amount — commonly around 20% of the purchase price of your new home. Unlike a traditional guarantor loan, your guarantor is only liable up to the specific guaranteed amount.
The family guarantee loan also allows for the guarantee to be discharged once you have paid off the guaranteed amount. This means that, after a certain point in your mortgage, your family are no longer liable for financial issues within your home loan.
Regardless of which type of guarantor loan you choose, the financial history of your guarantor could be a factor in whether the loan is approved, as they will be expected to step in financially if you fail to meet your obligations. As well as this, the amount you can borrow depends upon a range of factors, including whether you are a first home buyer, or if it is a building project, refinancing, or an investment property, with each lender having their own limits and requirements at play.
Financial windfall or gifted deposits
This is the golden egg option of no deposit home loans, wherein you have someone in your life both willing and able to gift you either the full deposit amount, or a significant portion of it. If you are fortunate enough to have a loved one capable of giving you that money, there are rules. These gifts can only come from your immediate family, who must provide a gift letter or statutory declaration to state that the money will be used for your home loan deposit, and that it is not a loan to be repaid. On top of this, lenders often require that the gift be held in your account for three to twelve months prior to applying for the loan, and for you to have accumulated at least five percent genuine savings, to prove that you will be capable of paying off your mortgage.
For those given a partial deposit, there are other ways to speed up the process that are often included under the umbrella term of no deposit home loans. On their own, these typically will not serve as a full deposit, but together can help make your home loan a reality sooner.
What are my other options for a home loan?
For those on high incomes with a spotless credit history and less than $10,000 in existing debt, it can be possible to undertake a personal loan of up to $20,000 to use as a deposit for your home loan. Clearly, this option is not for everyone, and depending on your spending habits, taking on dual loans can cause issues. Already having such a significant loan to be repaid can make it more difficult to arrange a home loan, especially if you have a habit of making late repayments or already have significant existing debt. However, ensuring payments are made on time can improve your credit score and help prove that you are a responsible borrower committed to working respectfully with lenders.
First Home Owners Grant
The First Home Owners Grant is a nationwide scheme to support first home buyers, providing a one-off payment that can be used as part of a home loan deposit. However, there is no standard grant amount for buyers, with the amount depending on where you intend to buy your home. The First Home Owners Grant ranges from $5,000 to $20,000 depending on the State, meaning that while the support is certainly helpful, it is typically not enough to be used as a full deposit.
The 2016 Genworth Homebuyer Confidence Index found that about 20% of first home buyers used their credit card to meet deposit requirements on their homes. However, credit card limits mean it is impossible for most people to use a credit card to pay their full home loan deposit.
The downside to no deposit home loans
While these options can help you reduce the time spent saving for a home loan deposit, financial experts highly recommend making savings a core part of your financial management strategy before trying to get a home loan. Getting used to having a certain amount set aside each pay cycle gives you time to adjust to the change in routine, and to see whether or not it’s sustainable before you’re saddled with a mortgage. It also helps lenders see you are committed to honouring your loan, and demonstrates your ability to effectively manage money and ensure your obligations are met on time.
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