No deposit home loan

Saving up for a deposit is no easy feat, especially if you’re looking to buy in capital cities like Sydney or Melbourne. With property values at eye-watering levels, home buyers may be wondering if it’s still possible to get a no deposit home loan?

While it’s worth keeping in mind that saving up a deposit can greatly improve your chances of approval for a home loan, there are still options available to would-be buyers to get a home loan without a traditional deposit. Let’s explore how Australian homeowners could get a home loan without a deposit.

Why do buyers need to save a deposit?

It’s worth understanding why home buyers are encouraged and, in most circumstances, required to save a deposit before gaining loan approval. The truth is that it is for the benefit of the buyer as much as for the home loan lender.

Saving a home loan deposit means you own a larger portion of the property and need to borrow less money from a lender. The less debt you need to take on to get a foot on the property ladder, the smaller your mortgage repayments will be.

Further, saving up a deposit for a home loan showcases a strong level of financial responsibility. Being able to budget genuine savings for a five or six figure deposit is no walk in the park, and by doing so you immediately boost your chances of approval to a lender.

If a homebuyer does not have a deposit of at least 20%, they will be required to pay Lender’s Mortgage Insurance (LMI). In terms of eligibility criteria, having a smaller deposit increases your level of risk to the lender that you may default on the home loan. LMI is paid to the lender and is an insurance that protects the bank in case you cannot repay the debt. Depending on the value of the property, this can climb into the tens of thousands of dollars range as well.

How to get a no deposit home loan

While it may be possible to take out a home loan without a traditional deposit, it does involve you following additional steps and jumping through some hoops to gain approval.

• Guarantor home loan

Bringing on a guarantor to your home loan may allow you to avoid saving a deposit altogether. A guarantor is someone (typically parents) who may offer up security, such as a property, to help guarantee a loan. It’s not a process to be taken lightly, as the guarantor will be responsible for repaying the mortgage if the borrower cannot make loan repayments.

Some lenders in Australia may offer 100% loan-to-value ratio (LVR) guarantor home loans, meaning the buyer is taking out 100% of the value of the property as a home loan. Some lenders may even offer 110% LVR home loans if a guarantor is present, meaning you can borrow extra funds for projects like renovations or to cover the cost of moving.

• Use equity in a property

If you already own property and have been paying off your mortgage for many years you may be able to borrow against the equity in the home to use a deposit for another home loan. While this option is not available to first home buyers, it is one option existing homeowners have to nab a second or third property while bypassing the process of saving a deposit.

Keep in mind that, like a guarantor loan, if you default on the new home loan the equity you offered up as security in an existing home may be seized by the lender. In a worst-case scenario, you may have to sell two properties.

• Speak to a broker

If you’re desperate to purchase a property but are seriously struggling to come up with the funds for a deposit, it may be worth speaking to a broker about low-deposit home loan options.

Some lenders may approve eligible borrowers with smaller deposits, such as 10%. A broker could assist you in boosting your application to gain loan approval with a smaller deposit. And there are currently several government buyer schemes available to help first home buyers get a property with a deposit as small as 5%, even 2% if you’re a single parent.

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