The pitfalls of no deposit home loans

No deposit home loans are pretty much a thing of the past, though there are still a few ways for selected borrowers to get their foot on to the property ladder with little or no deposit. It’s important to consider whether these options will be the best choices for you and your personal financial situation.

How can I get a no deposit home loan? 

Though 100% home loans were available in the past, mortgage lenders no longer offer these products as a rule. Most no-deposit home loans were phased out of the market following the fallout of the Global Financial Crisis (GFC) in 2008.

Even though you can no longer apply for a 100% home loan as standard anymore, there are still three main methods where you could buy a property without saving a deposit:  

1. Find a guarantor

Getting a family member to guarantee your loan is one way to get the keys to your first place without a deposit. Your guarantor (usually your parents) will need to have enough usable equity available in their own property that its value can fully guarantee the amount you’d otherwise pay as a deposit.  

Of course, if in the future you default on your repayments, your guarantor will become responsible for your mortgage. Plus, because the equity in your guarantor’s property will be used to guarantee your loan, your guarantor may not be able to put this equity to use elsewhere to support their own financial goals. Before applying for a guarantor home loan, it’s essential that everyone understands and accepts the risks and responsibilities involved. 

2. Use equity from another property

If you already the proud owner of another property, one option could be to borrow against the equity in that home instead of saving a deposit. This could let you purchase a second property, such as an investment property, without saving a deposit, though you could risk losing both properties if your circumstances change and you can no longer keep up with your repayments.

Consider contacting your current lender or a mortgage broker to find out how much of your equity you may be able to access, how you may be able to use it, and whether this option may help you to achieve your goals. 

3. Apply for a professional home loan 

Some lenders offer special home loan deals to borrowers working in professions that are more likely to involve steady employment and/or high rates of pay, such as doctors, lawyers, or engineers. If you work in a professional field, a lender may see you as a relatively low-risk customer and be willing to make special offers to attract your business, from discounting its interest rates and fees to waiving Lender's Mortgage Insurance (LMI) and lowering its deposit requirements. 

In a few cases, you may be able to apply for one of these professional home loans with no deposit, though the other eligibility requirements may be strict, and you may need to pay LMI. Consider contacting a mortgage broker to learn more about home loans for professionals. 

What are the risks of no deposit loans?

A bigger loan 

The less money you pay as an upfront deposit on a property, the more money you’ll need to borrow to buy it. A bigger loan can mean bigger repayments, and may take longer and cost more to pay off over time. 

Less equity

A large deposit not only helps a bank feel more comfortable about lending you money, but it can be the first step to building up equity in a property. Your equity is how much of a property that you own outright, and doesn’t have a mortgage owing on it. You can grow your equity by making principal and interest repayments and extra repayments, as well as through capital growth if property prices rise in your area. 

Because your deposit is typically your first piece of equity in a property, choosing a no-deposit loan means having to start building your equity from scratch. It could take much longer to build up enough equity to start putting it to use, such as if you want to refinance your loan, or access a line of credit. 

Higher rates and tighter eligibility criteria

When providing a home loan with no deposit, a lender may want to limit its financial risk in other areas. This could include charging higher interest rates and/or fees on a no deposit home loan, paying for an LMI policy on the loan, or requiring that a borrower fulfil stricter eligibility criteria regarding their income and expenses. You may find there are limited no-deposit loan options available to you, and you may find it challenging to satisfy the lender’s requirements.

Limited borrowing power

A lender may not be willing to offer as large a home loan to a borrower with no deposit as they would to a borrower with a deposit of 20% or more, due to the different levels of financial risk involved. A smaller mortgage could limit the properties you could afford to buy, especially if you’re shopping for real estate in one of Australia’s capital cities. 

Compare home loans in Australia