If your heart is set on buying property but you don’t have the savings to do so then a no deposit home loan could be an option.
No deposit home loans are a very high risk to lenders which means being approved isn’t all that easy. However, they’re a great option for borrowers who don’t have a deposit and can provide a promising application.
We’ve compiled the different ways to apply for no deposit home loans in one comprehensive list to prepare you for the process.
Why Do Lenders See A No Deposit Home Loan as High Risk?
Any low deposit home loan is defined as a deposit of 19% or less and is typically seen as riskier by banks.
Banks use the deposit as security to cover their losses if, for any reason, they need to repossess your house. This happens most of the time when the property value or sale of the repossessed property is less than the loan amount outstanding.
A deposit of 20% is more appealing for lenders as they feel there is sufficient equity within the property to cover any potential losses.
To reduce their risk, lenders require borrowers with low deposit loans of 19% or less to pay for lender’s mortgage insurance (LMI). This way, if the lender ends up at a loss, they will be covered by mortgage insurance.
Therefore, lending someone 100% of the purchase price when buying a home i.e. without a deposit, means that there will be:
- higher mortgage repayments, and
- higher mortgage insurance.
Why Do Most Lenders Require Demonstrated Genuine Savings for a Home Loan Deposit?
No deposit home loans are not that common because most banks require a minimum 5% deposit that has been acquired from genuine savings that the borrower has put aside consistently.
This serves as proof to the lender that prospective home buyers can manage their money diligently and efficiently and that they’ll be able to service their home loan repayments.
So, not only does someone applying for a loan without a deposit have to pay a higher mortgage repayment, higher mortgage insurance than someone applying for a 20% deposit home loan, but they also have no proof that they’re able to manage their money well and will be able to service these high premiums.
How Can You Obtain No Deposit Home Loans?
Lenders that approve no deposit home loans have more requirements than standard deposit home loans where they are borrowing 80% of the purchase price.
Potential borrowers have a greater chance of a successful home loan application with no deposit if:
- they have little to no debt or credit cards so banks know this mortgage is their main priority and expense,
- they possess a consistent employment history for the last 12 months (even if self-employed) and a high income, and
- they already have assets to their name, as it proves that they can pay off debts well.
The options for no deposit loans include:
- a guarantor loan,
- using your equity, and
- a personal loan.
Each of these no deposit loan options of buying something on the property market come with a long list of eligibility criteria to meet.
Guarantor Home Loan
This is probably the easiest and most successful way of being approved for a no deposit loan.
The most common way to do this is by asking your parents to pledge their house as a guarantee for your home loan.
As your guarantor, their property will provide security to your lender replacing the need to pay lenders mortgage insurance.
Banks could even award you a 105% loan so long as your parents have enough equity in their property and are still working, meaning there’s additional money to cover any extra fees and upfront costs such as stamp duty.
Using Your Equity
If you are already a homeowner, you could use the equity in your property to pay for your new home’s deposit.
To access your equity, you’ll need to refinance your property and draw the equity out, which would be used for the deposit and stamp duty.
Personal Loan
If you have proof of a consistently high income but don’t have any savings, you could apply for a personal loan to pay for the deposit.
There are some conditions that need to be met:
- your loan must cover at least a 5% deposit, and
- your credit history must be clear of discrepancies.
Remember that you’ll also have to cover any additional home loan fees and upfront costs such as stamp duty. Only certain banks allow for the use of personal loans as a deposit and generally could only be used to cover the shortfall on top of your existing deposit.
How the Mortgage Agency Can Help
Being approved for a no deposit home loan isn’t an easy feat, so employing the skills of a financial advisor or mortgage broker can come in handy.
Our mortgage brokers can help you with a no deposit loan by:
- identifying which lenders offer no deposit home loans,
- helping you set up your home loan application, and
- negotiating better rates for you.
If you decide to ask your parents to act as guarantors, we will guide you through the process of acquiring their home equity.
If you have your own home and would like to use its equity, we can assist you in finding the right lender in restructuring your loan to access that equity.
If you don’t have savings and want to use a personal loan to pay the shortfall of deposit, we will find a lender that will be most acceptable to this.
Key Takeaways
Lenders are reluctant to approve no deposit home loans because it puts them at a higher risk. Requiring borrowers to pay lenders mortgage insurance on low deposit home loans is a form of security.
Some banks do offer no deposit home loans, but they are quite rare and their criteria to meet is very strict, this is generally tailored to medical professionals. A mortgage broker can help you identify lenders and assist you with the home loan application process.
The three most common ways to acquire no deposit home loans are:
- a guarantor home loan,
- using your equity, and
- a personal loan.
If this is something you’re interested in, contact us today, and our mortgage brokers can help you through the process of acquiring your no deposit loan.
Disclaimer:
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.
