Buying a home is a significant milestone many Australians aspire to, but growing financial challenges are leaving many feeling overwhelmed. Amid the rising costs of living and rapidly increasing property prices, building genuine savings to place a house deposit to cover 20% of the property value and avoid having to pay lenders’ mortgage insurance is becoming more difficult than ever.
Fortunately, there are some helpful tools that could help you get into the property market sooner—namely, no- and low-deposit home loan options.
In this article, we’ll explore how no- and low-deposit home loans work, schemes that can help, like the First Home Owners Grant, and steps to help you get started.
What are No-Deposit Home Loans?
Home loans without initial deposits, also known as zero-deposit mortgages, present an alternative option for prospective homeowners. These loans enable individuals to acquire a property without spending years building genuine savings and offering an upfront payment.
A typical requirement when purchasing real estate is to furnish a deposit of about 20% of the total property value. This deposit serves two key purposes: it evidences the borrower’s saving capacity and dedication to advancing on the property ownership path. Without it, you would have to pay lenders’ mortgage insurance.
These no- and low-deposit home loans are particularly advantageous for those aiming to buy their first home. They allow buyers to cover the full price of the property without the pressure of accumulating a large sum for the deposit, thereby making property ownership more accessible.
Types of No- and Low-Deposit Home Loans Available in Australia
As a first-home buyer in Australia, you need to understand the several no-deposit home loans available to you:
Guarantor Home Loan
The popular option among first-home buyers is Guarantor Home Loans. The arrangement allows a family member, such as a parent, to guarantee a portion of the loan using the equity in their own property. Instead of offering a cash deposit, the borrower’s ‘guarantor’ uses their home equity as collateral, easing the deposit requirements.
Note that a guarantor home loan does come with responsibilities for the guarantor, who assumes a part of the loan’s liability. If you can’t make the loan repayments, the guarantor could end up covering the cost.Â
Family Home GuaranteeÂ
Launched in 2021, the Family Home Guarantee (FHG) is a governmental program to assist eligible single parents in entering the property market. The scheme allows for the purchase of homes using low-down deposit loans, requiring as little as 2% down. Additionally, the government provides a guarantee covering 18% of the property purchase price, effectively eliminating the requirement for Lenders’ Mortgage Insurance (LMI).
The FHG is only available to owner-occupier homes, not an investment property.
First Home Loan Deposit Scheme (FHLDS)Â
Then there’s the First Home Loan Deposit Scheme, a government-backed homeowner grant that helps first-time home buyers purchase a home sooner. Under FHLDS, eligible first-time home buyers can purchase a house with as little as a 5% deposit, with the government guaranteeing up to 15% of the property’s value.
Again, the scheme helps new buyers avoid the additional cost of Lender’s Mortgage Insurance (LMI).
Requirements & Eligibility Criteria for No-Deposit Home Loans
Applying for a no-deposit loan will mean more stringent lending criteria as you need to put forward the typical upfront costs. To ease this process, we’ve set out the various lender stipulations for you to review:
Your Financial Situation
In general, no-deposit home loans are predominantly aimed at first-time home buyers. These loans can be perfect for those who have stable employment but struggle to save for a large deposit. They’re particularly beneficial for those with high living expenses or other financial responsibilities, such as those who have just started their careers or have recently finished studying.Â
Your Income & Employment StabilityÂ
One of the most critical requirements for qualifying for these types of loans is demonstrating consistent and stable income.
Lenders need to be assured that you can meet your loan repayments, so having a solid employment history and a consistent, sufficient income stream will go a long way in securing their approval.Â
Your Guarantor’s QualificationsÂ
Next, your guarantor also needs to meet specific prerequisites. Lenders want guarantors who have a good credit score and a steady income, as well as homeowners who are close to paying off or have fully paid their mortgage.
In many instances, family members, especially parents, act as guarantors for first-home buyers by offering a percentage of their existing property as collateral.Â
Lenders Mortgage Insurance
Despite some options to avoid paying it, home loans that do not require a deposit usually have a higher loan-to-value ratio (LVR), leading lenders to mandate that borrowers cover the cost of Lender’s Mortgage Insurance (LMI).
Various elements, including the loan amount and the borrower’s financial circumstances, influence the expense associated with LMI.
Pros and Cons of a No Deposit Home Loan
No-deposit home loans can offer an excellent springboard into property ownership, but it’s important to weigh up the advantages and potential drawbacks:
Pros:Â
- A no-deposit home loan can help you move along your home ownership journey faster without saving up a traditional deposit. This is especially convenient for those with steady incomes who struggle to save because of high rental costs or other obligations.
- Having a guarantor can potentially increase the amount available to borrow, helping first-time home buyers purchase a more desirable property.
- For those lucky enough to have generous family members or friends, guarantor loans can allow them to contribute to your property purchase without having to physically give cash, which could attract a range of negative tax implications.
Cons :
- The major downside of no-deposit home loans is the inherent financial link to the guarantor. This means your financial decisions could potentially impact someone else’s credit score and vice versa.
- If property values decline, you may end up with negative equity. This means you owe more on your home loan than the property is worth—not ideal.
- Grief could come knocking if the guarantor passes away or finds themselves in financial strife. You’d then need to secure a new guarantor, possibly complicating your repayment plan.
- Should the worst happen and you are unable to meet your repayments, this will put a huge strain on your relationship with your guarantor, who’ll have to pick up the slack. This could potentially lead to the guarantor losing their own home.
How to Successfully Apply for a No-Deposit or Low-Deposit Home Loan
With the right guidance and assistance, the application process for a no-deposit and low-deposit loan can become more manageable.
Do Your Research
Begin by thoroughly researching and comparing various lenders that provide mortgages without initial deposits. Focus on finding those with the ideal loan features, competitive interest rates and favourable terms and conditions.
Finding a Suitable GuarantorÂ
A no-deposit home loan typically involves a guarantor who can offer sufficient guarantee for your loan. Often, this guarantor is a family member who pledges a certain amount of their property’s value as collateral. This method could be an excellent path for first-time home buyers with limited savings or a low income.
Be sure to have a careful conversation with your potential guarantor about the purchase price, their responsibilities and the risks involved, as they will be responsible if you default on your loan.Â
Meet Eligibility Criteria
It’s important to understand that each loan provider has unique eligibility criteria for no-deposit home loans, including income, credit history, and previous savings records. Ensure you meet these criteria before moving forward with your application.
Gather Your Paperwork
Accumulate the required documentation. This often includes personal identification, proof of income, bank statements, and a record of your savings. If you’re uncertain about the specific documents needed, it’s advisable to contact your chosen lender for clarification.
Receive Pre-Approval
Before you start looking for a house, consider getting pre-approval. The process entails a lender evaluating your financial situation and estimating how much you can borrow, which can greatly assist in understanding your financial capacity. Having loan approval sorted early can be crucial in setting a realistic budget and making more informed decisions about property prices.
Submitting Your Application
When filling out the lender’s application form, provide comprehensive and accurate information regarding your personal and financial situation. This will include details of your income, expenses, employment background, and any other pertinent information, supported by the necessary documents.
Key Takeaways
- A no-deposit home loan enables first-time home buyers in Australia to buy their dream home without a prior savings history.
- Several types of no-deposit home loans exist, including guarantor home loans, the Family Home Guarantee, and the First Home Loan Deposit Scheme (FHLDS).
- Eligibility for a no-deposit home loan depends on personal circumstances, income stability, and the qualifications of your guarantor.
- Mortgage brokers can help borrowers secure a no-deposit home loan by offering insights and guidance.
- No-deposit home loans have advantages, such as enabling home ownership without the need for upfront savings, and cons, like potentially higher interest rates over the loan term.
- To successfully apply for a no-deposit home loan, finding a suitable guarantor, having a stable financial position and good credit history, understanding your responsibilities, and considering using a mortgage broker are crucial steps to take.
- The choice of becoming a guarantor comes with responsibilities and potential risks, including the task of covering the home loan if the first home buyer defaults.
- Understanding the implications and risks is critical before signing a guarantor loan agreement, considering it is a long-term arrangement and could risk the guarantor’s own home.
- Volume discounts might help reduce mortgage payments and save money in the long run.
Remember, while a no-deposit home loan can open up the property market to you sooner, it’s essential to understand the implications. This includes balancing the upsides, like buying a home sooner, against the downsides, such as potential risk to your guarantor.
For more information, contact The Mortgage Agency today.
