No doubt you've heard that, not all that long ago, it wasn't difficult to get a mortgage without a deposit in Australia – in other words, a loan for 100% of the property price. Unfortunately, due to the global financial crisis of the late 00's, it is usually not possible to get a loan for the entirety of the property value, also known as a 100% LVR (loan-to-value), but there are exceptions to this if you meet some very specific criteria.
We'll be breaking down those criteria for you, as well as illustrating some ways that you can be approved for a mortgage without a significant cash deposit, as well.
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.