Saving for a deposit is often the first step many aspiring homeowners take before they get on the property ladder. It is also the most challenging step as the deposit amount, typically pegged at 20% of the property’s value, can easily reach six figures – especially with current home prices on the rise.
That amount may take the average Australian several years to raise. However, not having sufficient funds for a deposit does not necessarily mean your homeownership dreams are over.
Is it possible to buy a home with no deposit?
The answer is yes, but it would not be easy. Most traditional lenders do not offer no-deposit home loans because of the risks involved. Some specialist lenders provide 100% home loans to clients, but these usually come with very strict eligibility criteria and higher interest rates.
The best alternative would be loans with a loan-to-value ratio (LVR) of 95%, where you need to come up with a 5% deposit. However, you may still need to pay lenders mortgage insurance (LMI) for this type of loans.
Are you eligible for a no-deposit home loan?
To minimise their risks, lenders impose tight restrictions for borrowers applying for a 100% LVR home loan. These qualifications may include:
- Near-perfect to perfect credit scores with one of the main credit reporting agencies
- A well-maintained repayment history
- Stable source of income, which require continuous employment for at least three years
- A minimum salary of $150,000 per year for singles or $180,000 for couples
- Must be buying a standard property type (house, townhouse, unit, or vacant land) in a major town, capital city, or regional centre
How can you get a home loan without a deposit?
Even if you do not have sufficient funding for a deposit, there are still several ways you can secure a home loan. Here are some of your options:
1. Using a guarantor for your loan
One way of getting a no-deposit home loan is by using a guarantor. A home loan guarantor is an immediate family member, often a parent or a sibling – although uncles and aunts are allowed in some instances – who has agreed to take responsibility for paying the loan if the borrower fails to make repayments. Guarantors may also be asked to offer equity from their properties as security for the home loan. Some lenders offer guarantor loans of up to 105% of the property’s value to cover for additional expenses such as stamp duty and application fees.
2. Avail of the various government grants
First-time home buyers can take advantage of several state-based incentives to cover for the cost of a deposit. These include the First Home Owners Grant (FHOG), which is one-off cash grant given to first home buyers who are either purchasing an existing property or constructing a new house, and the First Home Super Saver Scheme (FHSS), which allows first home buyers to withdraw a portion of their extra super contributions and use it as a deposit for their first home.
Another government incentive, the First Home Loan Deposit Scheme (FHLDS), enables first home buyers to purchase a property for as little as 5% deposit without having to pay LMI. The program is limited to 10,000 borrowers in a given financial year, although the government opened an additional 10,000 spots for eligible buyers for the 2020/21 financial year.
These cash grants can be used on top of each other. The big question, however, is if the amount you can raise is enough for a deposit, given the monetary limits to these subsidies.
3. Access equity on your property
If you already have an existing mortgage, you can release equity built on your home loan over the years and use it as a deposit for a second property. This strategy is often adopted by investors to generate passive income.
4. Receive a huge financial gift
Some lenders allow borrowers who have received a huge monetary gift, either from their parents or close relatives, to use the amount as a deposit. However, there are also lenders that only accept a deposit made up of genuine savings, meaning you must have built the savings yourself.
It is worth noting that although purchasing a home without saving for a deposit may allow you to get on the property ladder sooner, it is still advisable for you to wait until you have saved enough before making the leap towards homeownership. Building sufficient funding for a deposit shows that you can manage your finances well and minimizes your risk of defaulting on your mortgage. It also increases your chances of getting a home loan approved.
How to get a 100% loan LVR in Australia
While the GFC made it harder to secure a loan for the entire price of a property, it's still not impossible. Of course, that doesn't mean that you won't have to have something on the table as a deposit, just that it may not have to be a cash asset.
Today, the most common example of a no-deposit loan is what is called a guarantor loan: when you use another piece of property as the security for the deposit. Typically the other property is owned by a close relative, such as a parent, and not only is it possible to get a discounted interest rate, it allows you to avoid a large financial deposit without being subject to Lenders Mortgage Insurance, or LMI.
The downside, of course, is that you're effectively bringing your parent or relative along for the ride with your property. In the worst possible scenario, say that you lose your job because of a serious injury and can't make repayments, the bank will first sell the home and then turn to the guarantors to cover any shortfall.
Luckily, a guarantor does not have to be on the loan for the entirety of the mortgage. As the value of the property rises and the loan continues to be paid down, the borrower can apply to remove their relative from being guarantors on the loan – although there may be discharge fees to be paid.
In general, guarantor loans are ideal for borrowers who have a consistent borrowing capacity and income, but lack the means to gather the initial deposit.
What other criteria does a borrower need to meet for a 100% loan?
Lenders will take a very hard look at someone applying for a no-deposit loan, and for good reason: if they're not extraordinarily vigilant, they could be awarding a loan to someone with a low likelihood of paying it off.
To that end, if you'd like to get a no-deposit loan, you'll need to make sure you can prove the following things.
- Stable income: You want to make sure the lender can see that you have a regular, reliable job that pays well enough for you to easily afford the loan payments. It's worth noting here that some occupations are statistically more likely to make the grade here, as they are less likely to become unemployed (think a doctor or a similar position).
- Solid history of repayment: You'll want to show that you have been paying your existing loans and debts back on time. Every credit card payment, car loan, and timely rent payment can help you convice them that you're a responsible borrower.
- Location: Lenders will be more likely to give a no-deposit loan to someone who is looking to buy property in a typical area, like a capital city, and the property should not be "unusual", in other words it should be a standard home or similar sort of space.
The 5% deposit
While the standard order of business for a mortgage in Australia is for a lender to handle 80% of the price and the buyer chipping in 20% of the price, it doesn't have to be. Usually borrowers can get up to 95% of the home price as a loan, but there are some key differences and criteria that need to be met in order to only put down 5% of the sale price up front.
For starters, loans above 80% LTV are subject to LMI, as we discussed earlier. The amount of insurance depends on the percentage you wish to take out – for sake of example, a loan for 85% of the property price will have a lower LMI amount than a loan for 95% of the price, and so on – and it's also important to note that this insurance is usually added to the loan, which will cost you more in the long run.
That said, 5% of a home's price is certainly easier to gather than 20%, so if you're in a situation where you're comfortable paying a little extra in mortgage insurance, a smaller deposit may be an option to consider.
How to qualify for a 5% deposit
Similarly to the qualifications for the no-deposit loan, banks and other lenders are going to be looking for signs that you have been disciplined with your finances. To do this, you can either show them that you have been regularly paying rent on time for as long as possible – and can raise the 5% deposit without borrowing it – or give them a look at your savings account over a recent period of time. If your savings have been holding steading or, better yet, increasing over that period, this can send a strong signal to lenders that you are a reasonable candidate for the loan.
Another thing to keep in mind is your credit score. The higher it is, the better things will look for you. This is true in most situations requiring a credit check, of course, but it's certainly something to keep in mind here.