In the Australian home loan market, it is extremely rare to find a no deposit home loan. While some home loans have low minimum deposit amounts, you will not be able to borrow from most lenders without providing a deposit or another guarantee.
While you’re unlikely to find a 100% no-deposit home loan in Australia, there are home loan options available with alternative security options. You may not need to save a huge lump sum for these home loans, though they typically have other risks and challenges to consider.
Why do banks want you to pay a deposit?
Whenever a bank lends money, they run the risk that the borrower might not pay it back, leaving the bank out of pocket. To protect their finances, banks usually require borrowers to pay a percentage of their loan’s value up front as a deposit. If the borrower defaults on their loan repayments, this deposit helps to minimise the bank’s losses.
The higher the deposit you can afford when applying for a home loan, the less of a risk the bank will deem you to be. Being a low-risk borrower can bring many financial benefits, such as lower interest rates, or access to flexible loan features.
Low-deposit home loans and Lender’s Mortgage Insurance
If you have some savings available, but not enough to afford a full deposit, you may be able to opt for a home loan that only requires a smaller minimum deposit.
But while low-deposit home loans may sound more affordable than higher-deposit options, there may be other costs involved. One of the most significant and most frequently encountered is Lender’s Mortgage Insurance (LMI).
LMI is an insurance policy that protects the lender’s finances in case the borrower defaults on their repayments. It only covers the lender, and not the borrower – borrowers looking to insure their repayments against financial hardship may want to search for Mortgage Protection Insurance. Because the lender typically passes the cost of LMI on to the borrower, LMI can add thousands of dollars to the total cost of buying a home.
LMI is based on your mortgage’s Loan to Value Ratio (LVR) – an expression of the amount being borrowed compared to the value of the property. LMI is usually required for most home loans with an LVR higher than 80% – that is, a loan where the borrower pays a deposit of less than 20% of the property’s value. Some specialised loan types from different lenders have higher or lower LVR requirements for LMI.
Do you need a deposit with a guarantor?
If you can’t afford a home loan deposit, it may still be possible to apply for a no deposit home loan by getting some help from a guarantor - a third party who guarantees your loan by volunteering to take responsibility for your debt if you’re unable to pay it yourself.
Guarantor loans may not require a deposit from the borrower, but they typically require the guarantor to meet certain standards. Because banks rely on borrowers and guarantors having close relationships, most banks will only accept the parents of the borrower as guarantors, though some lenders will accept other relatives, including grandparents, spouses and siblings.
A guarantor may need to pay the deposit on behalf of the borrower, or use the equity in their own property as security. Other requirements for guarantors can include being an Australian citizen or permanent resident, having a good credit rating, or having a steady income and/or savings available.
Becoming a guarantor is a major commitment. If the borrower fails to repay the loan for any reason, the guarantor will be required to cover the debts, which could see them lose their own house and/or savings. What’s more, guaranteeing a home loan (even for a reliable borrower) can affect a guarantor’s credit rating, making it more difficult for them to qualify for loans of their own.
Borrowing with equity
Borrowers who already have a home loan may be able to take out a new mortgage without paying a deposit. Instead, they can secure their loan using the equity in their current property.
Equity is the value of a property that the borrower owns outright – the total value of a property minus the amount still owing on the mortgage. The more of a mortgage’s principal the borrower pays back, the more equity the borrower has in the property. What’s more, properties in areas that experience significant capital growth (e.g. rising house prices, high demand) can further grow their mortgage-holder’s equity.
Equity can be used in place of a deposit to secure or guarantee a home loan, whether it’s a new home loan to refinance the current one, or an all new loan to purchase a second investment property.
The biggest risk involved when using equity to secure a home loan is that if you default on the loan, you lose the equity, which means having your property repossessed by the lender to recover the costs.
How to save for a house deposit
If want a home loan but have no money saved for a deposit, there are ways make the saving process seem less daunting.
Budgeting your incoming and outgoing expenses is one good way to start saving for a home loan. Spend a month recording money going into and out of your account, and work out how much you have left over to save at the end. From there, you can take a critical look at what you spend your money on, and cut down on any unnecessary expenses.
Keeping your money in a high-interest savings account can also help you reach your goal faster. The more money you put away in an account with a high interest rate, the more interest you can earn, so try to keep all your savings in the one place if possible. It’s also important to maintain a high enough minimum balance that you make more money in interest per year than the loan’s annual fee will cost you.