2021 has been an unprecedented year for the Australian property market. Due to the record-low interest rates, house prices have risen by 22% last year. In turn, this caused the median house price to increase for 15 consecutive months and reach a national average value of over $709,803.
So, the Australian house market is booming for the first time in over 30 years – but what does this mean for home buyers and investors?
Over the past months, banks have given new borrowing rules to face the surge in mortgage applications, and buyers are struggling to muster a deposit and take the first step up the property ladder. Luckily, some alternatives can help you secure the property of your dream without a deposit. Learn about the no deposit investment loan options below.
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.
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 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:
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:
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:
Some government grants and schemes can help you access no or low-deposit home loans. These include:
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:
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.
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:
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:
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.
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