Can you buy a home without a deposit?

By Mark Rosanes

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.

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