Can I buy a house with no deposit?
Entering the property market can be daunting, especially for first-time buyers lacking a substantial deposit. Fortunately, various options are available in Australia to assist buyers in securing a home loan without a traditional deposit. These alternatives often involve leveraging a guarantor's support or utilising government-backed schemes.
Understanding Low-No Deposit Home Loans
A no deposit home loan allows buyers to purchase a property without the standard 20% deposit. Instead, the loan is secured through alternative means, such as a guarantor's equity, government assistance programs or through paying Lenders Mortgage Insurance (LMI). While these loans can facilitate homeownership, they can come with higher interest rates and stricter eligibility criteria due to the increased risk for lenders.
Guarantor Home Loans
One prevalent method for obtaining a no deposit home loan is through a guarantor. Typically, a family member offers their property as security, covering the deposit amount. This arrangement allows the borrower to secure a loan up to 100% of the property's value, and in some cases, additional costs like stamp duty and legal fees can be included, effectively borrowing more than 100% .
For instance, if purchasing a $600,000 home, the borrower would usually need a $120,000 deposit to avoid Lenders Mortgage Insurance (LMI). In addition to that, if they aren’t first home buyers, they will likely need to pay for stamp duty. With a guarantor, this deposit requirement can be eliminated, making homeownership more accessible.
It is important to note that using a security guarantee will increase your total loan size - so your income needs to be sufficient to service the loan.
Government Assistance Programs
The Australian government offers several initiatives to assist first-time buyers in entering the property market with minimal upfront costs:
First Home Guarantee (FHBG): This program enables eligible buyers to purchase a home with as little as a 5% deposit without paying LMI. The government guarantees up to 15% of the property's value, effectively reducing the required deposit
Shared Equity Schemes: Programs like BuyAssist provide up to 25% of the property's value as a government or charitable equity contribution, covering the deposit entirely for eligible buyers
Other state-based programs exist and are worth exploring.
These schemes aim to alleviate the financial burden on first-time buyers, making homeownership more attainable.
Low deposit Loans with Lenders Mortgage Insurance (LMI)
Another way to purchase a home now, without a large deposit, is through securing a higher Loan to Value (LVR) loan that comes with Lenders Mortgage Insurance (LMI). This is an insurance policy that the bank takes out to protect them (not you) from any unforeseen issues.
LMI loans come with a cost which can become quite significant, the higher the LVR of the loan.
LMI costs can usually be added on to the total loan (what’s called capitalising the cost), so that you don't need to pay up front. But it is worth noting that this means you will be paying interest on this insurance for the life of the loan.
LMI loans usually come with higher interest rates than lower risk loans.
Considerations and Risks
While low/no deposit home loans can facilitate property purchases, they come with certain risks and considerations:
Higher Interest Rates: Lenders may impose higher interest rates to mitigate the increased risk associated with no deposit loans.
Fees - Lenders Mortgage Insurance
Guarantor Liability: If the borrower defaults, the guarantor becomes responsible for the loan, potentially jeopardising their property.
It's crucial for prospective buyers to thoroughly assess their financial situation and consult with financial advisors before pursuing no deposit home loans.
Low/No deposit home loans can offer a faster pathway to homeownership for Australians. By understanding the available options and carefully considering the associated risks, buyers can make informed decisions that align with their financial capabilities and long-term goals.