Return of the no-deposit home loan

Banks have relaxed their lending criteria amid growing competition in the mortgage market.

Would-be homebuyers can borrow up to 100 percent of a property’s purchase price, which is the first time in three years that lenders have offered loans with no deposit.

SGE Credit Union offers borrowers a no-deposit loan with its ‘Get Ahead Start Home Loan’ product. But there is a catch – you’ll need a guarantor to be eligible. And the rate is at the high end of variable options at 6.37 percent, according to RateCity.

Michelle Hutchison, spokeswoman for RateCity, said lenders were fighting harder for customers and market share. Seventy percent of home loans now offer 95 percent or more of the purchase price, she said.

“Institutions are doing this because home lending remains very subdued, and they need to kick start the market to keep profits growing.”

But the luxury of borrowing sooner and with a smaller deposit carries some risks; you’re more likely to pay a large cost for lenders mortgage insurance and you may not be eligible for the best mortgage deals as many lenders tier their interest rates based on the deposit you’ve got.

Choice spokesman Matt Levey warned that such attractive no-deposit loans could tip homeowners into financial distress.

“Just because it looks affordable now, there are a lot of things that can change in the economy and in your life that might make it less affordable in the future.” he told News Ltd.

A smaller deposit makes you more vulnerable to rate rises, for instance, said Hutchison.

“Recent history gives us the reason why this is important. For example, imagine you took out a $300,000 loan in April 2009. You may have got a variable rate as low as 5.18 percent. By November 2010, that rate would probably have risen to 7.05 percent. That would have meant an extra $345 in monthly repayments, just 18 months after you took out the loan,” she said.

“If you hadn’t budgeted for that, you’d be joining the ranks of people who are falling behind on their mortgage repayments.”

Even if rates don’t increase, borrowers with a “repayment buffer” will be in a better position to increase repayments voluntarily. The impact of paying an extra $100 per month on your repayments is much bigger than you’d think, as RateCity’s home loan calculator shows. On a $300,000 home loan at 7 percent, you’d potentially save up to $43,000 in interest and shave nearly three years off the life of your loan.

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