No Deposit Home Loans: The Pros and Cons
Are you dreaming of owning a home in Brisbane but struggling to save for a substantial deposit? Have you been told no deposit home loans are an option? The good news is, there are finance options available to help you achieve your goals, even without a large upfront deposit. We’ve put together this online snapshot of no deposit home loans and other options that may be available to you. Once you’ve read through this article, please feel free to book a free consultation with us and we can explore exactly what you need to secure a home loan.
What are No Deposit Home Loans?
The idea of a no deposit home loan is a loan that allows you to purchase a property without needing to save a significant portion of the purchase price upfront. When the cost of living clashes with high real estate prices, we find enquiries and online searches for phrases like “no deposit home loans QLD” and “home loans with no deposit” increase. This is understandable when the great Aussie dream is to enter the property market.
Is It Possible To Buy A House With No Deposit?
Let’s be straightforward about one thing: home loans with no deposit do exist, but they’re very few and far between. It’s tough getting a 100% deposit home loan from any of the traditional lenders. You might get lucky if you have a high income or a high value client the bank is chasing (a Surgeon etc), but as a rule of thumb, 100% home loans don’t exist. You might have to cough up a minimum deposit of around 5% for a low deposit home loan option.
However, some smaller or specialist lenders might offer their own versions of 100% home loans, but these opportunities are rare and come with harsher terms such as:
- Having a specific tertiary education
- Years of continuous employment
- A higher threshold for minimum salary (usually $150,000 p.a. or more)
- An exceptional credit history (hint: they might look into your rental history)
Pros and cons of a no deposit home loan
Pros
- No need to save a large deposit upfront
- Potential to enter the property market sooner
- Opportunity to build equity with less capital
- May have access to government incentives and grants
- Less financial stress initially
Cons
- Higher interest rates
- Strict eligibility criteria
- Potential for mortgage stress
- Tougher loan approval process
- May have higher ongoing costs
How To Get Home Loan With No Deposit Or Low Deposit In 4 Ways
When you are unable to save for a substantial deposit and you are looking to borrow without a deposit, there are alternatives to the “no deposit home loan” option. Let’s run through the three most common ways home buyers can access finance for a property without needing their own deposit or only needing a fraction of a deposit amount.
1. Guarantor loans
With a guarantor loan, a family member or friend provides a guarantee for the loan. How this works is that the lender will use the guarantor’s own property as security for the loan in the absence of a deposit.
They must have equity in their property that can cover at least 20% of the purchase price of the new property (and total loan needed including their current loan can not exceed 70% of the value of the home they are putting up for security). However, the guarantor takes on significant financial risk and is responsible for the loan repayments in case the borrower defaults on their loan.
Before taking out a guarantor loan, it’s essential to carefully consider the potential impact on both the borrower and the guarantor, and seek advice from a financial professional.
2. Using equity to buy a house
Home equity is the difference between the value of a property and the amount that is still owed on the mortgage. If you have an existing property that has built up a significant amount of equity in it, you may be able to use it as collateral to secure a no deposit home loan.
Here’s how you can use home equity to get a no deposit home loan:
- Start by getting an accurate appraisal of your property’s value. This will give you an idea of the amount of equity you have built up and whether it is enough to secure a no deposit loan.
- Contact several lenders (or your broker) to discuss your options for using your home equity.
- Once you have found a lender who can offer you a no deposit home loan, you can apply for the loan.
- If your loan application is approved, you will use your home equity as collateral to secure the loan. This means that if you default on your loan, the lender can take possession of your property.
3. A Gift
In order to secure a no deposit home loan, the banks generally require a minimum deposit of 8% to 10%. If your parents are willing to give you a monetary gift to cover this deposit, it can be used towards purchasing your first home.
However, it’s important to note that the banks will carefully consider the gift when making a lending decision. They may require documentation to prove the gift is genuine and not a loan that needs to be repaid. They may also want to see your rental history to verify your ability to make regular repayments on time.
Having some of your own savings, known as genuine savings, can also be beneficial in the lending decision. This demonstrates your commitment and ability to manage your finances and make regular repayments.
4. Government Assistance
The Queensland government offers several initiatives to assist first-home buyers in purchasing their own homes. One of the most notable programs is the First Home Owner Grant (FHOG). This grant provides a cash incentive to eligible first-home buyers purchasing a new or existing property in Queensland. The amount of the grant varies depending on the property’s location and value.
In addition to the FHOG, the Queensland government also offers other assistance programs, such as stamp duty concessions and regional home ownership grants. These programs can help reduce the upfront costs associated with purchasing a home.
At the federal level, the Australian Government’s First Home Loan Deposit Scheme (FHLD) is another valuable option for first-home buyers. This scheme allows eligible buyers to purchase a property with a deposit as low as 5% by providing a government guarantee to lenders. This can significantly reduce the upfront costs of buying a home.
It’s important to note that eligibility criteria and the specific benefits of these government programs may change over time. Therefore, it’s recommended to consult with a financial advisor or a home loan specialist to get the most up-to-date information and to determine if you qualify for any of these programs.
Key Considerations for No Deposit Home Loans
- Eligibility Criteria: Lenders often have strict eligibility requirements, including income levels, credit history and employment stability.
- Interest Rates: No deposit home loans might come with higher interest rates compared to traditional loans.
- Ongoing Costs: Be aware of additional fees and charges associated with these loans.
Partnering with North Brisbane Home Loans
At North Brisbane Home Loans, we’re committed to helping you navigate the complexities of home loans with no deposit or low deposit so you can make an informed decision on your home loan finance. Our experienced team will assess your financial situation and explore all available options to find the best fit for your needs. Contact us today to schedule a consultation and start your journey towards homeownership.
Patrick Cranshaw, a Certified Mortgage Professional for over 21 years, founded North Brisbane Home Loans in 2002. His career began with ANZ Bank in New Zealand, where he progressed over 16 years to a Business Banking role in Virginia. After moving to Brisbane in 2000, Patrick led the QLD market for a home loan agency, helped set up the REMAX Real Estate Finance division, and practiced as a broker.
