What are no deposit home loans?
No deposit home loans are home loans in which the lender does not require the applicant to pay a deposit.
Who offers no deposit home loans?
In Australia, lenders no longer offer no deposit home loans. While it’s impossible to find a no deposit home loan, other options may be available.
Why don't lenders offer no deposit home loans?
There was a time when a typical Australian could borrow 100 per cent or even 105 per cent of the value of their property. But not any more. The reason is that regulators want to remove risk from the mortgage system, and people with smaller deposits (or no deposits) are regarded as more likely to default on their home loans than people with larger deposits.
Regulators fear a lot of these 'riskier' borrowers might default on their home loans if interest rates significantly increased. That, in turn, would have negative implications for Australia's banking system and wider economy.
What are some alternatives to no deposit home loans?
Although no deposit home loans are not available, borrowers do have access to a few alternatives.
One of these alternatives is a guarantor loan. A guarantor loan is a home loan in which a parent or close family member guarantees your loan. This means that your guarantor is responsible for making your payments should you default on your loan.
Another alternative is a 95 per cent home loan. A home loan with a 95 per cent LVR, or loan-to-value ratio, will allow you to pay a low deposit on your loan.
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.
How can I take out a home loan if I have bad credit?
It can be a challenge to take out a home loan with bad credit, but it is possible. If you have bad credit, you can opt for a guarantor home loan so that your lender feels more secure in approving your application. You may also be able to find a specialist lender who bases their decision on more than credit history.
What are high-LVR home loans?
High-LVR home loans are loans that have a higher LVR, or loan-to-value ratio, than other home loans (which usually have an LVR of up to 80 per cent). In other words, the amount you borrow is much higher than the amount of deposit.
Consider an example in which an applicant is buying a home worth $300,000. A high-LVR home loan may have a 95 per cent LVR, which means the applicant would receive a loan of $285,000 and only have to deposit an amount of $15,000.
Who offers high-LVR home loans?
High-LVR home loans are offered by a range of banks, credit unions and non-bank lender. Each has different rates, fees and features, so it’s best to compare before you apply.
How do you compare high-LVR home loans?
When comparing high-LVR home loans, consider the interest rate, fees and maximum LVR. Decide how much you can afford to deposit and what LVR you need. Ensure you can afford to make the repayments on time and in full.
Another thing to weigh up is whether or not you need to pay lender’s mortgage insurance. LMI, as it’s known, is an insurance policy designed to protect the lender, rather than the borrower. Some lenders insist that borrowers take out LMI with high-LVR mortgages.
How can you improve your chances of being approved for a high-LVR home loan?
One of the most effective ways of improving your chances of being approved for a high-LVR home loan is to choose a loan that allows a family pledge or guarantor. A guarantor is especially important if you’re looking for bad credit home loans. A guarantor will be responsible for making your repayments should you default, which gives peace of mind to the lender.
Another option is to try to find ways to increase your deposit, because you will have more options open to you if you’re chasing, say, a 95 per cent home loan rather than a 97 per cent home loan.
You could also consider speaking to a mortgage broker who specialises in borrowers with bad credit and/or low deposits.
Case study: Andrew and Janet secure a high-LVR loan
Andrew and Janet want to buy their first home for $400,000. They both have a steady income and have been able to save $20,000, which is 5 per cent of the price of the house. They thought they were set because they had met the deposit required for a 95 per cent LVR home loan – but what they forgot was that they needed an additional $15,000 for stamp duty, conveyancing and other transaction costs. They didn’t want to wait to save the additional funds, so they asked Andrew’s parents to guarantee their 95 per cent LVR home loan. Because his parents agreed, Andrew and Janet were able to secure the high-LVR home loan and purchase their first property.
What are the pros and cons of high-LVR home loans?
High-LVR home loans have upsides and downsides. The main benefit is that you can buy sooner. This can save you money in the long run if it means spending less ‘dead money’ on rent and getting ahead of a rising market.
However, high-LVR home loans also have drawbacks. One of these drawbacks is that the eligibility criteria is strict. Applicants typically must have good credit and a history of paying on time.
Another disadvantage is that you will probably have to pay LMI, which may not be transferable should you want to refinance down the track.
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.