Real Estate News

Is A No Deposit Home Loan A Good Idea?

Published 4th September 2022Updated 3rd April 2023

a couple considering a no deposit home loan to buy their first house

Want to break into the property game, but struggling to save a decent deposit?

If you earn enough to meet your loan repayments, a no deposit home loan could be your solution to securing that investment property you’ve been thinking about for a while. 

A home loan with no deposit allows you to get into the property market sooner, removing the need for a large upfront payment.

We’re here to help you make an informed decision on no deposit home loans and find out if this type of loan is right for you. We’ll be breaking down how no deposit home loans work, exploring the pros and cons of buying a property with no deposit, and guiding you through alternative lending options.

What are no deposit home loans?

A no deposit home loan is a specialised loan where the borrower doesn’t pay a deposit, and instead gets approved for 100% of the property’s value from a lender.

Very few true “no deposit” home loans exist these days. If they are available, they still typically require a minimum deposit of 5-10% of the loan amount. 

Low deposit home loans are more common but also come with strict lending criteria. That’s because banks approve these loan types on a case-by-case basis and many lenders have comprehensive risk assessments when it comes to these riskier loan options.

If you are able to find a lender to approve your no deposit home loan, it’s important to be aware that you’ll also have to pay Lenders Mortgage Insurance (LMI), which is calculated at 20% of the purchase price

Be sure to budget for this upfront cost and legal fees when doing your number crunching.

How does a no deposit home loan work?

There are generally very strict criteria to meet when applying for a no deposit home loan. This may include a high or near-perfect credit score, a proven responsible repayment history (such as a history of paying credit card debts and bills on time), and stable employment income backed with payslips or a recent tax return.

Typically, lenders like to see that you have saved up for a deposit via regular bank deposits. In most cases, banks are risk averse and will only approve these types of loans if you’re a PAYG employee (either on a full-time or part-time basis). That’s because self-employed borrowers are already seen as ‘riskier’ borrowers to banks.

All this paperwork is designed to ensure your lender feels satisfied that you’re capable of meeting mortgage repayments. In some situations, the lender may ask for a statutory declaration stating that you understand the conditions of the loan and repayments, too.

The pros of no deposit home loans

The most obvious benefit of a no deposit home loan is that no savings are needed to secure the investment property of your dreams! 

But here are some of the other key advantages of a home loan with no deposit:

  • Securing an investment property sooner: You won’t miss out on that perfect property opportunity while you’re trying to scrape together a decent deposit. This is why no deposit home loans for first-home buyers are particularly popular, as these younger borrowers often have a lower savings balance.

  • Grow your property portfolio faster: A no deposit home loan might be handy for purchasing property #2, or perhaps even #3 or #4!

  • No huge savings required: You don’t need to have access to thousands of dollars in capital. If you fit the criteria of a “good borrower,” some lenders will lend out 105-110% of the property’s value to cover all associated purchase costs, such as legal fees.  

The cons of no deposit home loans

There are a number of risks to consider when applying for a no deposit home loan. 

Here are some of the drawbacks to factor in before considering one:

  • Higher interest rates: When offering a home loan with no deposit, the lender may limit its financial risk in other areas. This could include charging higher interest rates or adding in extra fees for a no deposit home loan, which means you’ll end up paying more over the life of your loan.

  • Strict lending requirement: With more lending hoops to jump through, it’s harder to even qualify for a no deposit home loan. Ultimately there might be lots of time and admin involved which can make buying an investment property harder than its worth.

  • Greater risk of depreciation because of minimal equity: Your equity is the percentage of a property that you own outright, and doesn’t have a mortgage owing on it. When purchasing property with a no deposit home loan you have zero to no equity. However, you can grow your equity by making principal and interest repayments and extra repayments throughout the life of the loan, as well as through capital growth if property prices rise in your area.

  • Hidden upfront costs and expenses: When it comes to a no deposit home loan, lenders will need to limit their risks in other areas by charging extra feels like Lender Mortgage Insurance.

Can I get a no deposit home loan as a first home buyer?

Yes you can! If you’re struggling to save your deposit or get approval for a low / no deposit home loan, there are a handful of alternatives that you should look into. 

Here’s some other ways of purchasing your first-home (or an investment property) without a deposit: 

  • Apply for a Guarantor Loan: It may be possible to get a family member or close friend to “guarantee” your loan. Your guarantor needs to have enough equity available in their own property and are responsible for paying back the entire loan if you can’t.

  • Apply for a First Home Owner Grant: You may qualify for a First Home Owner Grant (offered by all Australian States and Territories) if you are an eligible first home buyer. Eligibility criteria and the amount provided to approved home loan applicants vary with different scenarios and locations. Keep in mind this grant is not available to property investors.

  • Using Equity from a Current Property: If you’re looking to expand your property portfolio, you may be able to access equity from one of your existing properties to fund your deposit. This is typically relatively low-risk and much easier than saving up cash for each purchase.

Disclaimer: The views, information, or opinions expressed in this blog post are for general information purposes only and should not be relied upon. We have not taken into account specific situations, facts or circumstances, and no part of this blog post constitutes personal financial, legal, or tax advice to you. You should seek tax advice from your accountant, specific to your situation.

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