Are you diligently trying to save a 20% deposit for your first home but it’s taking too long? While a 20% deposit allows you to avoid paying mortgage insurance or other premium fees, there are still ways to buy your first home with little or no deposit.
Option 1: Low deposit home loans
There are some loans you can apply for that don’t require such a sizeable deposit – but you have to be deemed a low-risk applicant to qualify.
Lenders will allow you to borrow up to 95% of the home’s purchase price only if you meet strict criteria, including a spotless credit history, stable employment, a high enough income that allows you to meet the repayments, genuine savings and minimal debt.
The location of the property may also impact your eligibility for a low deposit loan as some lenders choose not to take a risk on properties in smaller towns or high-rise buildings in the CBD. Some banks even offer low deposit home loans.
Is there a catch?
Frankly, yes, because having a smaller deposit can incur other costs. Firstly, lenders will normally charge you Lenders Mortgage Insurance (LMI) if your deposit is less than 20%, which can add to the cost of your purchase.
Some lenders, such as the Commonwealth Bank, may charge you a Low Deposit Premium instead of LMI – you will need to calculate and compare the costs to see which is the right deal for you. A Low Deposit Premium (LDP) is essentially the same as LMI in being an additional cost to the borrower – the difference is that LMI is paid to an insurance provider (which covers the cost to the lender if you default and your property is sold at a loss), while an LDP is paid directly to the lender and acts as a “risk fee”.
Option 2: No deposit loans
In the years since the GFC, lenders no longer offer no-deposit home loans. One way to get creative is to use a windfall, such as an inheritance or a monetary gift from family members.
Usually, lenders like to see that you saved up for a deposit because it shows that you will be able to meet the repayments, but some are willing to accept gifts as deposits. You may have to meet certain conditions, such as keeping the windfall in a savings account for a set period of time or being required to provide a statutory declaration that the money was a gift.
Is there a downside?
Not having a deposit means you have to borrow more money, which means you may end up paying more interest over the life of the loan and, therefore, taking longer to pay it off. Consider whether this is the only option available to you before going ahead – an Aussie broker can help you assess all your options.
Option 3: Enlist family help
More Australian parents are helping their children buy their first home by acting as guarantors. The practice has been dubbed the “bank of mum and dad” and it means your parents – or other close family members, if they are willing – can guarantee all or a portion of your loan using their own home as equity. That means, if you are unable to pay off the loan, the guarantors will be held responsible for any remaining repayments.
Another advantage of having a guarantor is that you are able to reduce or avoid paying Lenders Mortgage Insurance.
Keep in mind that not all lenders allow you to borrow 100%, even with a guarantor. For example, NAB will only accept guarantees on a portion of the loan not the entire amount, so you still have to save a deposit but it can be less than 20%.
Other lenders, however, may allow you to borrow extra – up to 110% of the property purchase price – if you have a guarantor. This can help cover stamp duty (if applicable), legal and other costs associated with buying a property. For example, the Greater Bank’s Family Pledge Home Loan allows you to borrow 110% of the property purchase price.
Is there a downside?
There is a slight downside with this option because it means your parents or family are “in the game” with you until they can be released by either paying down the loan or your property value rises and they are not needed for equity anymore. To help you find the right deal, make sure you get the right mortgage advice by speaking to an Aussie Broker.
Consider your options
As you can see, there are ways to buy your first property with little or no deposit. Before you make a decision on which one is right for you, make sure you talk to your finance professional to explain all the options and what it means for you. Remember, the smaller your deposit, generally the larger your repayments will be, so make sure you know your budget and comfort level with repayments so you don’t get in over your head.