Many people buy a house in Australia through a mortgage agreement. But, most providers of mortgage loans require you to make a downpayment of up to 20% of the total home value before the loan application can be processed. This deposit is considered as a safety net against the possibility of the borrower defaulting on the loan.
However, not everyone can afford to make the initial deposit, for various reasons. Thankfully, there are a few no deposit loan options that are available to you in Australia. After the financial crises of 2008, all no deposit loan products require a guarantor.
A guarantor home loan is a no deposit loan that requires an existing homeowner to use their home’s equity in lieu of the deposit for your loan. Through such loans, you can borrow as much as 105% of the selling price of your desired property, without having to show any amount in savings or making any initial deposit.
Tip: The guarantor can be anyone in your close family, including your parents, who own a home and are willing to pledge their property as security against your loan.
The total amount approved as part of the loan will vary depending upon your borrowing status. For example, first time buyers, investors, and home builders may be able to generate as much as 105% of the total amount, while debt consolidators may get as much as 110% of the total value. Refinancers may be able to get as much as 100% of the total amount.
Tip: the final approved amount depends on various factors, including the lender’s assessment and lending criteria.
Choosing A No Deposit Loan
There are no major differences between a no deposit guarantor loan and a normal home loan, in most cases, as both types of loans share most of their features.
While selecting a no deposit loan, the most important factors you must consider are the rates, fees, and the terms/conditions applicable on the loan. Also, lenders may have unique eligibility criteria when it comes to no deposit loan borrowers and guarantors, so a quick analysis of these requirements can help you select the best available no deposit loan option.
For example, some lenders may not accept applications from borrowers who are self-employed or accept guarantors that do not fulfill the eligibility criteria as prescribed by the lender.
The lender’s application processing timeframe is also important when selecting the most suitable no deposit loan option available in the market. Since a no deposit loan will most likely require a guarantor, the lender may take a longer period of time (compared to regular mortgage loans) as it needs to assess the financial circumstances of both the borrower and the guarantor before approving the loan.
Tip: this approval timeframe may vary between lenders, so you should select one that aligns the best with your requirements.
I Don’t Have A Guarantor, What Other Options Do I Have?
Not everyone has a close family member that owns a home and/or is willing to act as a guarantor by pledging their own property as security against your no deposit loan. Under such circumstances, there are a few alternative options you may consider which allow you to secure a home loan without making any deposit from your personal savings.
Use a Personal Loan
One approach used by many home loan borrowers in Australia that don’t have sufficient savings is to acquire a personal loan to make the deposit. Although this approach will not work with some lenders that require borrowers to make at least a 5% deposit from their own savings, for many lenders it is acceptable to make a deposit through a personal loan.
However, you must take into consideration the higher burden of servicing two separate loan products; the personal loan and the home loan. Make sure your income is sufficient to afford regular repayments on both the loans.
Also, you should opt for this option only if you have a good credit history, as a personal loan can become very costly for those who have a bad credit score. Lastly, getting a personal loan before applying for a home loan can also reduce your home loan borrowing capacity.
A Monetary Gift
If you have received funds from someone as a gift, most lenders will accept it as genuine savings if these funds have remained in your bank account for more than six months. However, some lenders may accept such gifts as a deposit even if you have recently received them.
Use Equity On Another Property
If you hold another property, you can use its equity (the difference between the property’s value and the outstanding home loan obligation on it) as a deposit against the new home loan. Many lenders in Australia accept up to 80% of equity on an existing property as a deposit, while some may even accept up to 95% if the borrower subscribes to lenders mortgage insurance (LMI).
Get A Low Deposit Loan
If you are unable to find a no deposit loan or procure enough funds to make the deposit, then you may consider a low deposit loan. Many lenders in Australia are offering loans requiring deposits below 5%, which may be the most affordable option for you.
Can I use my credit card to make the deposit on a home loan?
Yes, according to data reported in 2016, around 20% of all first time home buyers in Australia used their credit cards to partially fund their initial deposit.
How much deposit is required to buy a house in Australia?
Most lenders will require you to make a deposit of between 5%-20% of the total purchase price. Those requiring the minimum 5% deposit may also require you to buy Lenders Mortgage Insurance (LMI) for an additional cost.
Do I need a guarantor to secure a no deposit loan?
Yes, the only option to secure a no deposit loan at this time is to have a guarantor on the loan application. This guarantor offers the necessary security to the lender which is otherwise fulfilled with the initial deposit. In case the borrower fails to make due loan repayments, the guarantor is required to repay the due loan amount.
How much does Lenders Mortgage Insurance (LMI) cost?
Lenders Mortgage Insurance can cost around 2% of the loan amount.