The pitfalls of no deposit home loans

The pitfalls of no deposit home loans

No deposit home loans are pretty much a thing of the past, however you can still get your foot on to the property ladder with little or no deposit, if you play your cards right.

There’s no question, low deposit home loans are handy, particularly if you need to buy a property in a rush and you haven’t had time to save up enough money.  And while lenders are really cracking down on people who don’t have a decent deposit, there are options available:

1. Find a guarantor

Getting a family member to guarantor your loan is one way to get the keys to your first place without a deposit. It does come with risks however, especially if you can’t meet your monthly repayments so do some research on what’s involved so you can make an informed decision. Before you sign the dotted line, use a mortgage calculator to make sure you can meet the repayments, even if interest rates rise by 2, 3 or even 4 per cent, which is an entirely likely scenario over the course of the average home loan.

2. Use equity from another property

If you already the proud owner of another property, one option could be to borrow against the equity in that home.  The best place to start is to talk to your existing lender, or a financial adviser to find out how much you can draw from it.

3. Save up for a 3 per cent deposit

While its not ideal, some lenders will allow you to borrow 95 per cent of the property’s purchase price – or even 97 per cent if you include the LMI you’ll be required to pay as part of your loan, which means you’ll only have to come up with 3 per cent of the total cost. These products are harder to come by and most will have higher interest rates attached, so weigh up your options by comparing interest rates online.

Having genuine savings in your account is the key to securing home loan approval. Not only will it take the pressure off adjusting to making your mortgage repayments, but it will drastically help you save on interest costs. However, if you still decide to take the plunge with help from a family member, or with a very small deposit, there are a couple of downsides to low or no deposit home loans that it is important to be across:

1. Higher interest rates

Many lenders will charge you a premium for the luxury of a small deposit. In fact, as a general rule, the bigger the deposit you have, the lower your rate will be. The cheapest home loan rates on RateCity require loan to value ratios of 70 or 80 per cent, which means you’ll need a 20 – 30 per cent deposit before you can unlock the best rates.

2. Lenders Mortgage Insurance

Lenders mortgage insurance (LMI) often comes as an unexpected (and unwelcome) surprise when you finalise your home loan, but only if your deposit is less than 20 per cent of the purchase price. Anyone with a loan to value ratio (LVR) of under 80 per cent, gets out of paying this expensive extra.

LMI is generally about 2 – 3 per cent of the purchase price of your property but it also depends on how large your deposit is, so if you are scraping through on the bare minimum, expect to pay over $10,000 in insurance, even for a reasonably priced property. Also be aware that while having an extra bit of insurance sounds like a fairly sensible thing to have, LMI is actually there to cover your lender, not you.  To find out more about LMI, visit the Insurance Council of Australia’s site.

3. Less borrowing power

The smaller your deposit, the less you’ll be able to borrow, even if you have a stable job and a decent salary coming in each month.  That’s because banks typically see people with no savings as risky.  If your finances go through a rough patch, or you get unexpectedly retrenched, then the bank will know you don’t have any spare cash to fall back.

To secure your dream home today, compare home loans, crunch the numbers using our repayment calculator and follow our news articles to get the latest home loan tips. For more information visit our detailed home loans guide or check out ASIC’s MoneySmart home loans fact sheet and checklist.

 

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Learn more about home loans

How much deposit do I need for a home loan from ANZ?

Like other mortgage lenders, ANZ often prefers a home loan deposit of 20 per cent or more of the property value when you’re applying for a home loan. It may be possible to get a home loan with a smaller deposit of 10 per cent or even 5 per cent, but there are a few reasons to consider saving a larger deposit if possible:

  • A larger deposit tells a lender that you’re a great saver, which could help increase the chances of your home loan application getting approved.
  • The more money you pay as a deposit, the less you’ll have to borrow in your home loan. This could mean paying off your loan sooner, and being charged less total interest.
  • If your deposit is less than 20 per cent of the property value, you might incur additional costs, such as Lenders Mortgage Insurance (LMI).

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

How much deposit do I need for a home loan from NAB?

The right deposit size to get a home loan with an Australian lender will depend on the lender’s eligibility criteria and the value of your property.

Generally, lenders look favourably on applicants who save up a 20 per cent deposit for their property This also means applicants do not have to pay Lenders Mortgage Insurance (LMI). However, you may still be able to obtain a mortgage with a 10 - 15 per cent deposit.  

Keep in mind that NAB is one of the participating lenders for the First Home Loan Deposit Scheme, which allows eligible borrowers to buy a property with as low as a 5 per cent deposit without paying the LMI. The Federal Government guarantees up to 15 per cent of the deposit to help first-timers to become homeowners.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

How much of a deposit do I need for a home loan from the Commonwealth bank?

The minimum deposit the Commonwealth Bank usually accepts is 10 percent of the amount you wish to borrow. However, a deposit of at least 20 percent of the amount you’re borrowing is needed if you wish to avoid Lenders Mortgage Insurance (LMI). LMI is charged for smaller deposits to give the lender extra recourse if the borrower fails to repay their loan. 

As an alternative to LMI, some borrowers with smaller deposits may opt to pay the Commonwealth Bank’s low deposit premium fee. It is a one-time, non-refundable charge that is added to a low-deposit home loan.

The deposit and the loan amounts are used to determine the LDP -, the higher the deposit, the lower is this cost. 

When calculating how much you need to save, don’t forget to factor in other expenses like stamp duty, insurance, legal fees, and moving costs.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

How can I get ANZ home loan pre-approval?

Shopping for a new home is an exciting experience and getting a pre-approval on the loan may give you the peace of mind that you are looking at properties within your budget. 

At the time of applying for the ANZ Bank home loan pre-approval, you will be required to provide proof of employment and income, along with records of your savings and debts.

An ANZ home loan pre-approval time frame is usually up to three months. However, being pre-approved doesn’t necessarily mean you will get your home loan. Other factors could lead to your home loan application being rejected, even with a prior pre-approval. Some factors include the property evaluation not meeting the bank’s criteria or a change in your financial circumstances.

You can make an application for ANZ home loan pre-approval online or call on 1800100641 Mon-Fri 8.00 am to 8.00 pm (AEST).

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

Can I apply for an ANZ non-resident home loan? 

You may be eligible to apply for an ANZ non-resident home loan only if you meet the following two conditions:

  1. You hold a Temporary Skill Shortage (TSS) visa or its predecessor, the Temporary Skilled Work (subclass 457) visa.
  2. Your job is included in the Australian government’s Medium and Long Term Strategic Skills List. 

However, non-resident home loan applications may need Foreign Investment Review Board (FIRB) approval in addition to meeting ANZ’s Mortgage Credit Requirements. Also, they may not be eligible for loans that require paying for Lender’s Mortgage Insurance (LMI). As a result, you may not be able to borrow more than 80 per cent of your home’s value. However, you can apply as a co-borrower with your spouse if they are a citizen of either Australia or New Zealand, or are a permanent resident.

Can I get a NAB home loan on casual employment?

While many lenders consider casual employees as high-risk borrowers because of their fluctuating incomes, there are a few specialist lenders, such as NAB, which may provide home loans to individuals employed on a casual basis. A NAB home loan for casual employment is essentially a low doc home loan specifically designed to help casually employed individuals who may be unable to provide standard financial documents. However, since such loans are deemed high risk compared to regular home loans, you could be charged higher rates and receive lower maximum LVRs (Loan to Value Ratio, which is the loan amount you can borrow against the value of the property).

While applying for a home loan as a casual employee, you will likely be asked to demonstrate that you've been working steadily and might need to provide group certificates for the last two years. It is at the lender’s discretion to pick either of the two group certificates and consider that to be your income. If you’ve not had the same job for several years, providing proof of income could be a bit of a challenge for you. In this scenario, some lenders may rely on your year to date (YTD) income, and instead calculate your yearly income from that.

How can I avoid mortgage insurance?

Lenders mortgage insurance (LMI) can be avoided by having a substantial deposit saved up before you apply for a loan, usually around 20 per cent or more (or a LVR of 80 per cent or less). This amount needs to be considered genuine savings by your lender so it has to have been in your account for three months rather than a lump sum that has just been deposited.

Some lenders may even require a six months saving history so the best way to ensure you don’t end up paying LMI is to plan ahead for your home loan and save regularly.

Tip: You can use RateCity mortgage repayment calculator to calculate your LMI based on your borrowing profile