Do you want to buy a home but have been unable to save up for a deposit for several reasons? Don’t throw away your dream of owning a home just yet…
In this comprehensive guide, we will tell you some tips for getting a home loan with NO DEPOSIT.
Let’s dive right in.
Table of Contents
1. Guarantor loan
This is the best and most recommended way to get a no deposit loan.
A guarantor is someone with an existing property who is willing to take on the legal responsibility should the borrower not be able to make their loan repayments.
A guarantor home loan allows you to lend up to 105% of the property you’re purchasing. It also means that you don’t need a deposit.
Will a guarantor home loan, 80% of the loan will be secured by the property you are buying, and the remaining 25% will be secured against the guarantor’s property. In other words, the bank will give you an 80% loan against the property you are buying, and the remainder goes on the guarantor’s property.
The borrower will then make repayments to both facilities, with the guarantor only coming into play should the borrower default. However, the guarantor’s liability is limited to the portion they have guaranteed – 25% – and would become responsible for this portion should the borrower be unable to meet their commitments.
Most people who take out this loan structure opt to use their parents as guarantors to access a higher loan amount. So, mum and dad’s property would have a second mortgage registered on their property.
However, the value of the security needs to be big enough so that their current loan’s LVR is 80% or lower. This means that the guarantor needs to have enough equity in their property to use it as security for your loan. Therefore, it is important for your guarantor to get legal and financial advice to make sure this is suitable for them because, in a worst-case scenario, the guarantor’s property could be at risk in a foreclosure situation. So, do get that advice and make sure it is suitable.
Please call our team on 1300 088 065 (or +61410000689 if you’re overseas) or fill out our online assessment, and one of our Mortgage Brokers will give you a call to discuss your home loan options.
What are some of the benefits of a guarantor loan for borrowers?
- You’ll be able to get a home loan without a deposit and be able to waive Lenders Mortgage Insurance (LMI) because the bank is taking a second property from your parents as security for your mortgage. This is one of the main benefits of having a guarantor.
- You can still qualify for a lower ongoing interest rate. The additional security offered by your parents means that you are a lower risk to the bank than someone borrowing 95% of the property value. So, if your job history, income and credit score are all acceptable to the bank, you could be an ideal borrower!
- You can borrow up to 105% LVR to help cover stamp duty and conveyancing costs.
- The guarantor only remains until you have paid a certain loan amount. Generally, this is about 20% of the loan.
What are the downsides of a guarantor loan?
Really the only downside is that a family guarantee loan is mostly a short-term strategy, as you ultimately want to remove your parent’s property from your loan within 2 to 5 years of buying your new home. It comes down to how your property value is going and how much of your loan you have paid down.
Read More: See how much you’d save in LMI.
2. First Home Owners Grant
In some states, you may qualify for the First Home Owners Grant, which means you might be able to access up to $15,000 towards your new home.
If you are in Queensland and you signed a contract to buy a brand new home or build a new house between 1 July 2016 and 30 July 2018, you are eligible for $20,000. However, if you signed the contract to build or buy after 1 July 2018, you are eligible for $15,000 towards buying or building a new house, unit or townhouse valued at less than $700,000.
In New South Wales, if you are a first-home buyer and are buying a newly built house, the government can give you $10,000. But the house has to be worth $750,000 or less.
In Victoria, if the home is worth $750,000 or less, you can get up to $10,000, and if the home is in regional Victoria, you can get up to $20,000.
But can you use this first home owner grant as a deposit? Yes, you can! Many lenders are willing to consider these grants as a deposit, which means you are essentially buying your home without having to save up for a deposit.
The First Home Owners Grant differs from state to state, so find out what the eligibility requirements for your state are. With this grant, you can only buy a residential property, and you have to move into the home within a year and then live there for 6-12 months.
3. Gifted funds
The banks generally require an 8% to 10% deposit. So, if your parents are happy to give you a cash gift for this deposit amount, it would be enough to help you get into your first home!
Sometimes, depending on the gift amount, the person gifting you the deposit can sign a form that says it’s non-refundable and that they’re giving you the gift forever.
In order to have these funds considered as a deposit, the bank would need a signed letter from the gift giver. Here’s an example wording of what would need to be included in that letter.
“I acknowledge and pledge this gift as 100% non-refundable. The funds are gifted for purchasing a house, in which I do not have any financial benefit or interest. I will not be residing or living in the home. “
But…the banks look at a few other things when allowing a gift.
- They might want to see your rental history to make sure that you have a history of making regular repayments on time.
- It always helps if you have a little of your own savings, which can be used towards the purchase. These are known as genuine savings.
4. Partnering with someone
You can partner with someone and come up with an arrangement that works for both of you – this is called a joint venture. For example, the other person can put up the deposit, and you can make the repayments for a period until you have ‘paid back’ the deposit and then you can start sharing the repayments.
Partnering with someone usually helps in the case where that person has a deposit saved up but has very little borrowing capacity. By joining forces with someone who has the borrowing capacity but no deposit, both will be able to enter the property market sooner. It’s a win-win situation.
For example, if your partner pays a $50,000 deposit upfront and the loan repayments are $2,000, you can repay the full $2,000 until you get to $50,000. In other words, you will make the first 25 repayments. After that, you and your joint venture partner can start paying $1,000 each towards the loan repayment.
There are so many different arrangements you can make. For example, your partner can put down the $50,000 deposit, and if you are a handyman, you can do $50,000 worth of renovations on the property.
So, yes, a joint venture is another way you can buy a home without a deposit.
5. A property syndicate
If you add a couple more people to the joint venture, it becomes a property syndicate. Or you can just join a syndicate that’s already there. That way, you would need to invest very little on your part, and it might help you buy without a deposit.
But be very careful about joint ventures and syndicates, as there is the potential of being cheated. Make sure you do your due diligence and find out everything about the syndicate you are joining. Also, make sure to get a lawyer or conveyancer to take a look at your contracts before signing.
6. Owner’s finance
Owner’s finance can allow you to buy a house with no deposit.
With owner’s finance, you owe the seller and not the bank. Normally, if you are buying a home through the bank, the bank gives the seller $500,000, and then you pay the bank back over time—usually 30-40 years.
But in the case of owner’s finance, you can agree with the seller that you will pay them for the property over a certain number of years. So you actually owe the seller and not the bank. In this case, even though you technically own the property, the seller will keep the title deeds. Once you have finished paying them for the property, you can get the title deed.
Although it is very rare to find sellers who would agree to this, it is possible.
However, with owner’s finance, you can’t really take 30 years to pay it back. So bear in mind that your repayments will be way higher than a regular loan. But it all depends on what you and the seller agree on.
With owner’s finance, you will still have control of the property—you can live in it or rent it out if you want. You can even renovate it. So remember that with owner’s finance, you don’t owe the bank, but you owe the original owner of the property, and you can buy the home with no deposit.
7. Medical Professionals
If you are a medical professional, you could qualify for specialised lending, where you may be able to borrow up to 100% of the value of your home.
The way it works is that the loan would be split into 2:
- The first loan offered is just a normal home loan and can be paid off over 30 years. This first portion would make up 90% of your loan.
- The remaining 10% would be offered as a term facility and must be repaid within 5 – 10 years, depending on the bank’s assessment.
Not all lenders offer this type of lending. This is highly specialised lending, so depending on which role you have in the medical profession, this option may not be available to you. But you may qualify for other home loan benefits as a medical professional.
8. Advantageous purchase
This strategy is so rare that we’ve only seen it once in the past decade.
An advantageous purchase is where you buy a home for significantly less than its market value. It typically occurs when a property is sold due to a dispute, divorce, deceased estate, bank repossession and many other reasons. In this case, the home is sold fast and without the necessary due diligence to ensure it is sold for the market value.
Ordinarily, banks will lend based on the lower purchase price or valuation. But with an advantageous purchase, the gap between the valuation and purchase price is so large, greater than 20%, that the banks can use the valuation to lend against accordingly. This means you could borrow 100% of the purchase price.
9. First Home Loan Guarantee Scheme
This scheme allows you to buy a home with a 5% deposit without having to pay Lenders Mortgage Insurance. This is because the government acts as a guarantor to secure the remaining deposit to get you to 20%.
However, there are some things to consider with this scheme:
- Some lenders want you to have at least a 5% deposit as genuine savings. Although this is not a zero deposit, it is way lower than a 20% deposit.
- Only a limited number of home buyers a year are chosen. From 1 July 2022 to 30 June 2023, there are 35,000 places available for the scheme. Your chances of getting it are quite low.
- The scheme is also run as some sort of a lottery, which further reduces your chances of getting it. However, at Hunter Galloway, a few of our clients have managed to get the grant.
- If you are single, you have to be earning no more than $125,000, and if you are a couple, your total income should not be more than $200,000 a year.
- There are property price caps. So, to be eligible for the scheme, your property will have to be below a certain value. For example, in Queensland, the property price cap is $700,000.
- You cannot use it to buy an investment property—you have to live in the property.
- The scheme is only open to Australian citizens. So, if you are a permanent resident, then unfortunately, you do not qualify for the First Home Loan Deposit Scheme.
10. Rent to buy
Rent to buy allows you to move into any home with a 2.5% deposit. You essentially buy now and pay later based on a pre-agreed purchase price.
During the period, a portion of your rental cost goes towards your future deposit. When you eventually buy the home, you use the increased equity and the deposit saved over this period.
Without going into too much detail, renting to buy is one we suggest avoiding. If you delve into the details, you’ll see that it’s designed to make the most amount of money from people who aren’t financially literate.
This one doesn’t really apply if you’re a first-home buyer, but it still applies if you’ve got an existing home. You can use the equity in an existing property, and you won’t need a deposit.
This is the fastest way to borrow more money because saving takes time. For example, if you have a property that you purchased three years ago that has increased by $300,000, you can use that $300,000 as equity to purchase the next property.
It’s a great way to expand your portfolio faster without waiting until you have saved the deposit. The only thing you need to look out for is getting into too much debt. So just make sure you do your cash flow and modelling to ensure that you can afford it because you are potentially borrowing 100% on the new property without putting a deposit in, so your repayment is going to be much higher.
12. Property option
With a property option, you go to the seller and give them a payment of between 1-30% of the property’s value as an option fee. This gives you the option to buy the property from the seller at a later date for an agreed-upon price.
If the value of the property increases, then you can buy the property at the set price but still be able to get full finance for it because the value has increased.
However, if you eventually fail to buy the property, you lose the option fee. This method usually works if the option period is very short and you are offering a very high amount. In this case, you may get away with offering less than 1% of the property value.
The property option route is really ideal if you are a seasoned property investor.
What is required for a no deposit home loan?
The lending criteria for a no deposit home loan can be really strict, so it’s important to pay attention to key lending requirements to get it approved.
- Good Credit. To qualify for a no deposit home loan, it’s important to take responsibility for your debt right from the beginning. Maintain a good credit history, or reach out to the businesses that have given you a default and see if it can be lifted. Lenders are very strict about this requirement in Australia because they are liable if they don’t lend responsibly.
- Well-maintained repayment history. Lenders will be looking to see if you have delayed any of your debt repayments. This includes personal loans, rent, and credit cards. So make sure you make all your payments on time, and if you accidentally miss a payment, rectify it as soon as possible.
- Stable income source. This is another variable that completes the equation when it comes to getting a no deposit home loan. You should have a strong and ongoing source of income that allows you to repay the debt on time. In Australia, professionals in medicine, accounting or law are known to have stable employment and therefore have very high chances of getting approval for no deposit home loans.
- Location and property type. To get a loan approval without a deposit, you may have to buy a standard type of house. In addition, almost every lender wants the borrower to purchase a property in a major regional area, town, or capital city.
To help your application get through in the quickest time frame possible, you’ll need to bring supporting documents like bank statements, payslips and identification.
What if I have a 5% deposit?
You will be able to get a home loan with only a 5% deposit. However, the terms will differ between lenders. If you only have a 5% deposit, this needs to be genuine savings, which means that it’s not just money from your sister selling her car or money you’ve borrowed from your Aunt, as this is considered a gift.
If you have a 5% deposit, you will likely have to pay Lenders Mortgage Insurance (LMI), which can run into thousands of dollars.
Read More: Genuine savings.
What are some things to consider with a “no deposit” loan?
Here are a few things you should consider if you want to go the “no deposit” route:
- No deposit doesn’t mean no upfront costs. You may still need to have money put aside to pay for things like bank fees, legal costs and building and pest reports.
- The bank applies stricter lending criteria for no deposit loans.
- In some states, no deposit loans are only available in capital cities and major regional centres.
- With a no deposit loan, you are essentially borrowing 100% of the property value, so be prepared that your repayments may be higher.
- Some lenders may even charge higher interest rates for some no deposit loans. But this differs from lender to lender.
- If you want to build a property portfolio, try not to get too many no deposit loans because you may risk overextending yourself. If you want to build an investment portfolio, take a look at our rentvesting strategy to own 3 properties in 3 years. The link is in the description.
- Finally, remember that a deposit is only one aspect the bank looks at when evaluating your loan application. They also look at your income, expenses and credit file to ensure you can pay back the loan. These are just as important as having a deposit.
Generally speaking, a guarantor loan will mean that you’ll have a better financial outcome, and you won’t need to save for a deposit and spend time waiting. However, if getting a guarantor isn’t an option, then consider a low deposit loan and aim for a 95% loan.
On the other hand, saving a deposit is more stable depending on the property market. It means that another person doesn’t need to take responsibility for your loan, which could be an issue if the property market drops.
If you are aiming for the First Home Loan Deposit Scheme, then you should bear in mind that the scheme is run as a bit of a lottery and applying for the scheme doesn’t mean you’re guaranteed a spot. You might be lucky and get a place—you might not. So to cover your bases and avoid missing out on your home, we still recommend saving an 8% deposit.
Whether or not you should save for a deposit really depends on your personal circumstances, which is why we recommend speaking to our team at Hunter Galloway for a personal review.
What are some other ways I can save for a home loan?
- First of all, consolidate any debt that you have. This includes credit cards, personal loans, or even Afterpay. The more debt you have, the higher risk as a customer you are. Be aware that even if you don’t actually have any money owing on your credit card, your credit limit will still be considered as debt. If you have any credit cards that aren’t in use, get rid of them.
- Once all your debts are paid, you can implement the 50/25/25 Budget Rule. This is where 50% of your income is spent on essential living expenses, 25% on lifestyle spending, and the remaining 25% on savings.
- Track your goal by using technology to automate your savings. Set up monthly direct debits from your pay into a separate savings account. This will allow for the out-of-sight, out-of-mind mentality to enable you to generate your savings.
At Hunter Galloway, we’re all about budgeting and can tell you the different ways to save for a home loan.
Bonus: Can I use a personal loan as a deposit?
There are many websites and videos out there that are still encouraging people to get personal loans and use that as a deposit.
What’s the problem with getting a personal loan and using it for a deposit? Well, these days, the banks are now more diligent, and they will do their research to find out how you got your deposit. Once they find out you got your deposit from another loan, you can be certain they will deny your home loan application.
Also, personal loans can reduce your borrowing capacity by hundreds of thousands of dollars. Yes, that’s right—making a payment of just $500 or $1000 a month towards a personal loan can reduce your borrowing capacity by hundreds of thousands of dollars.
So, no matter how persuasive the video telling you to get a personal loan is, just don’t do it.
Bonus: Differences between loan features for no deposit loans and regular loans?
In most cases, you’ll have access to the same features as other home loans. This includes flexible payment packages and waived fees. Often the interest rates are pretty low. However, the most important part is finding a lender that is happy to do a no deposit loan, as this can be difficult sometimes.
Read More: How to find the best home loan in Brisbane.
Bonus: Do I have to pay LMI on a no deposit loan?
The amount you save for a deposit, and sometimes your profession, will determine whether or not you pay LMI.
As a general rule, If you have less than a 20% deposit, i.e. borrowing over 80% Loan To Value Ratio (LVR), banks consider this a high-risk loan and will apply lenders mortgage insurance.
If you are in certain professions, you could still be eligible for waived LMI with a 90% loan and 10% deposit without needing a guarantor…
Speak to us about this and get a free assessment today to find out about your personal situation.
Next steps and getting your home loan.
The information on this page is general and should not be considered as advice. Before you act on this information, you must seek independent legal and financial advice.
More resources for homebuyers: