How to buy a home: no deposit needed

by Andrew Willink
30 July 2008

If you have your heart set on a home of your own, you’ll know that a deposit is the ideal way to go. In fact, a 20% deposit has always been the benchmark towards home ownership. But if you have ever tried to save up a deposit for a home, you’ll know it’s a hard ask.

You start out with the best of intentions – budgeting down to the last cent, way over-staying your welcome at your parents place, religiously sticking to free entertainment and virtually eliminating all other fun with friends unless they shout.
Even though you tell yourself repeatedly that the suffering will all be worth it in the end, after a time it’s likely that chinks start weakening the armour, allowing real life back in. This is followed by the desperate realization that you’ll be 80 by the time you have saved up a sizeable deposit on a home.

What’s the solution to the age-old problem?

It is possible to buy a home and get a home loan with no deposit. In fact, it’s becoming more popular to do so. In the nineties 4% of real estate purchased was done so without a deposit. Today that figure has almost doubled.

Borrowing 100% of the property price effectively means you bypass the time spent saving for a deposit. It also means you can get into the property market a lot sooner and hopefully take advantage of rising real estate prices over the next few years. If you know precisely that property values will appreciate, you’re home and hosed but no-one can predict with complete accuracy what their property will valued up in 12 months time.

Going straight into a full 100% loan is not all plain sailing. First up, you should remind yourself of the obvious. Borrowing the full amount means you will have no equity in the home and it will take you a long time to build up any equity because you are predominantly paying the interest component, not the principle, in the first few years.

In the worst case scenario, should the real estate market flatten, you may end up owing more than the home is worth. For example, if you borrow 106% loan – and yes, you can do this - for a $300,000 house, it will take you nearly five years just to pay the 6% extra on top of the property value. If you sell within 5 years, it is more likely the proceeds from sale still won’t repay your debt.

By borrowing only 80% of the home’s value, you will have immediate equity, should anything go wrong.
The bottom line is that other than setting yourself a strict savings plan there really is no shortcut to a deposit. However, if you are determined to buy a home of your own and are short of a deposit, don’t give up, as it is still worth looking around for a home loan that suits your situation.