No Deposit Investment Loans

According to recent statistics, 6 million out of the 10.3 million properties in Australia have an average of $549,055 worth of mortgages against them. And, on average, buyers will require a deposit worth at least 20% of the home purchase price as a deposit.

However, if you don’t have a deposit saved, this doesn’t mean that you have to give up on your dream of stepping up the property ladder and securing your dream property.

No deposit loans – which are also known as 100% home loans – can help you access your desired property without the 20% home deposit.

However, it is worth keeping in mind that, despite their name, no deposit home loans will still require a guarantor, deposit, or equity to be granted.

Today, only a few lenders in Australia make no or low deposit home loans accessible. However, some home loan lenders allow approved applicants to borrow 100% of the home’s purchase price – or even up to 105%, which allows homebuyers to cover additional closing costs such as legal fees, taxes, and stamp duty.

As we have seen, some lenders might help you cover the property’s purchase price and more. However, if you don’t have a traditional 10% or 20% deposit, you will still need an alternative way to secure the loan. Indeed, not even the flexible home loan lender will grant a 100% unsecured home loan!

In the next sections, you will find alternatives to a traditional deposit to make your application less risky in the eyes of the lender.

Guarantor Loan

The most popular and practical way to access no deposit or low deposit loans is through a guarantor loan. Guarantors loans are particularly popular among first-time buyers and those who have not had the chance to save a substantial enough deposit.

Opting for a guarantor loan means seeking help and security from a guarantor – who is usually a parent, family member, partner, or close relative.

Here’s what to expect from a guarantor loan:

• – The guarantor’s property and equity will be used to secure the loan
• – You won’t need to have genuine savings or enough money for a deposit
• – A guarantor loan can give you access to borrowing amounts upwards of 100% of the purchase price
• – Guarantors loans are not subjected to the same criteria as other low deposit loan alternatives
• – You won’t be required to pay Lender’s Mortgage Insurance (LMI)
• – If your guarantor has good credit and a high income, you can even access low-interest rates

The role of the guarantor is relatively simple: they will be required to co-sign your loan application. In turn, the lender will consider their income, job history, and credit history to assess the loan risk.

A guarantor who co-signs the loan application makes it more likely for you to access a 100% home loan. However, this role comes with important responsibilities. Indeed, the guarantor has to provide all the relevant documentation, undergo a credit score check, and take on the responsibility for missed payments.

While there are pros and cons of guarantors loans, it is important to keep in mind that this type of loan only involves fixed liability to protect the guarantor. This means that, in the case of missed payments, the guarantor will only be responsible for the agreed-upon amount, not the entire loan value.

If you already own a property, you can leverage the built-up equity that comes with it to purchase a new investment property without a deposit. If you are opting for this alternative to a standard deposit, you will need to make sure that:

• – Your current property provides enough equity for your purchase;
• – You have enough money to cover additional costs, including legal fees, application fees, taxes, and stamp duty.

To ensure that your existing property gives you enough equity to secure your investment property, it is important to understand what home equity means.

Home equity represents the difference between the property’s current market value and the outstanding balance that is still owed for that property. Thanks to today’s estate market boom in Australia, the chances are that your home has risen in market value and it is worth more than what you owe. This means that you will have a “positive equity,” which can be used as an alternative to a traditional deposit to access an investment loan.

Above we have explored two alternatives to a traditional deposit that allow you to borrow 100% or up to 105% of the property’s market value without the need for genuine savings. But what if you have already saved a small deposit of around 3-5% of the total property price?

In this case, you can find low deposit investment loan alternatives that allow you to bulk up your existing deposit and reach a standard 20% of the purchase price. In turn, a higher deposit gives you more access to more mortgage options and better interest rates.

One of the most common ways to reach the deposit threshold you need is to take out a personal loan. However, for this strategy to work, you will need to meet certain criteria:

• – You need to be in an extremely robust financial position
• – You will need to have a high income
• – You need to have a small deposit available
• – Your existing debt should not exceed $10,000
• – Your credit history needs to be sparklingly clean
• – You will need to prove a stable job situation

If you are looking to borrow money from your parents to obtain the deposit necessary to secure a property, you are not the only one.

According to 2019 statistics, around 20% of first-time homebuyers rely on the “Bank of Mom and Dad.” To take the first step up the property ladder, younger homebuyers borrowed an average of $70,000 each, for a total of over $30 billion – which made parents the ninth-largest home loan lender in Australia!

Ultimately, you can use monetary gifts to achieve a 10-15% deposit necessary to secure a suitable mortgage – often even without genuine savings.

If you are using monetary gifts, inheritance, or lottery winnings as a deposit, bear in mind that lending requirements might change because you have not saved the funds yourself. Some banks might not accept deposits not made by genuine savings, and others will ask you to provide proof that the monetary gift is unconditional and non-refundable.

Superannuation – often referred to as “super” – refers to the money that your employer sets aside from you over your working life. These funds, which can be withdrawn only when you turn 65 or when meeting certain criteria, are designed for you to live on when you enter retirement.

If you have $150,000 or more in superannuation, you can use these funds as an alternative to a traditional deposit and buy a property leveraging a so-called self-managed super fund (SMSF).

Superannuation is not for everyone for the following reasons:

• – Because of the complexity of this financial product, you might need to work with a financial advisor to set up your SMSF
• – High loan-to-value ratio (LVR) loans are not accessible through SMSFs, and you can only borrow a maximum amount of 80% of the purchase price
• – You can’t live in an SMSF-purchased property, it must be a property for your investment portfolio

Some government grants and schemes can help you access no or low-deposit home loans. These include:

• • – First Home Owners Grant (FHOG) – introduced in 2000, this grant allows first-time buyers to find financial help from the local state government. Among the key criteria to access this grant is the requirement for the borrower to live in the property for a certain period.
  • – First Home Loan Deposit Scheme – this government initiative allows 10,000 eligible first-time homebuyers each year to access home loans with deposits as low as 5%. The government acts as a guarantor and helps the buyer secure a deposit of up to 20%.
  • – Family Home Guarantee – this government scheme is designed to help 10,000 eligible single parents buy or build a home with a minimal deposit of 2%. This scheme is not exclusively accessible by first-time home buyers and will run through the financial years 2021-2025.

If your financial situation meets the requirements set by the lenders, in Australia, you might have access to no-deposit and low-deposit home loans from certain lenders. It is important to keep in mind that:

• – Having a guarantor, equity, or collateral can help you get approved
• – Lenders will determine the eligibility of each candidate on a case-by-case basis
• – You might not be able to access LVR higher than 95% (depending on your income and financial situation)
• – You will need a reliable source of income and undergo several checks
• – In most cases, you might still need to save a small deposit of at least 5%
• – Some upfront costs might not be included in no deposit home loans, including legal fees, inspections, and stamp duty.

Find out more about eligibility criteria below.

No-deposit home loans can be a key solution for home buyers and investors to access the property ladder. Nonetheless, they come with an increased perceived risk for lenders and borrowers alike – making them less than ideal for some estate buyers. Find out the pros and cons of no-deposit home loans below.

Advantages of No Deposit Home Loans

• – They are key to helping first-time homebuyers access the property market
• – They can help property investors expand their portfolio
• – Guarantor loans remove the need for Lender’s Mortgage Insurance (LMI), which is usually required for loans greater than 80% LMR
• – Buyers with a small amount of savings can access properties that would otherwise be beyond their means
• – In today’s real estate market, it has become more difficult for homebuyers to set aside a 20% deposit
• – No deposit home loans won’t require home buyers to wait to have the necessary funds to secure a property, thus accessing time-bound deals.

Disadvantages of No Deposit Home Loans

• – No- and low deposit home loans require applicants to meet stricter criteria – including the support of guarantor or equity.
• – Because they are perceived to be riskier, loans without deposits might come with higher interest rates
• – Low deposit loans might only be viable for certain types of properties
• – Borrowers might find restrictions on where the property in question is located
• – Most lenders won’t consider self-employed professionals
• – The approval process could be lengthy and difficult

What’s more, is that there are risks connected to the property market fluctuations. For example, if the property market falls, the borrower might end up owing more than the property’s value.

When seeking a loan for a property without a deposit, you might face stricter application criteria that you will need to meet. Bear in mind that different lenders might set different eligibility criteria and evaluate each candidate’s application on a case-by-case basis.

Some of the must-have criteria that all applicants will need to meet include:

• – Perfect or high credit score – the first thing borrowers will check to understand your financial situation is your credit score. Applicants must have a high credit score with an accredited reporting agency, such as Equifax, Experian, or Illion.
• – Good repayment history – your repayment history will depend on how prompt and responsible you have been in repaying current debts, credit cards balances, rent, and personal loans.
• – High employment income – lenders will look into your employment history and stability to determine the level of liability. Generally, you will need a stable job with a high enough income to be considered a suitable candidate.

The criteria seen above are must-have requirements that need to be met. Some other criteria that can help you lower the loan’s perceived risk and secure a loan with a low deposit include:

• – Excellent credit history – your credit history will include the length of history, repayments, the amount owed, debts, and credit score. Make sure to polish your credit history before applying.
• – High income – higher incomes can help you secure a high LVR loan and lower interest rates because you can more easily keep up with repayments.
• – Stable and consistent job history – you will need to have been working for at least 6 months in a permanent, full-time position.
• – Minimal debts – a lot of personal unsecured debts might reduce your chances of getting approved. Consider paying off your debt before applying for a no deposit mortgage.
• – Property characteristics – the type and location of the property will affect your chances of approval. Lenders will prefer standard properties (units, townhouses, and houses) located in regional centers, capital cities, and major towns.

No deposit home loans can be an important tool for some homebuyers, but they come with risks that shouldn’t be underestimated. Make sure to seek financial advice and the help of a specialized mortgage broker to understand if this is the right choice for your needs.