Saving for any item can be tough. But, when it comes to banking the thousands needed to secure a home loan, it’s even more of a challenge. Taking out a no deposit home loan could be the way to negotiate your way around this financial roadblock, so you can buy a home sooner.
What is a no deposit home loan?
Usually, a lender will ask for a 20% deposit when you seek to buy a home, as this reduces their risk, but if you don’t have a deposit, you can apply for a guarantor no deposit home loan. This type of home loan is typically secured on your behalf by a third party – such as your mum, dad, aunt, or uncle – using an asset. The asset is usually a residential property that has a loan-to-value ratio of less than 80%.
For example, Neena and her partner want to buy a home for $350,000. Sure, it’s a renovator’s delight, but Neena is an interior designer and her partner is a licensed builder. The couple can afford the home loan repayments; however, they’ve only saved $20,000 towards the deposit. With lenders asking for a 20% deposit, Neena and her partner know they’ll need to find another $50,000 to secure the mortgage. Knowing the home represents excellent value for the asking price, Neena turns to her family for support. Her aunt, who owns her home, agrees to act as a guarantor as she has more than enough equity in her property to secure the loan.
How much can I borrow using a no deposit home loan?
The amount you can borrow under a guarantor loan depends on what type of buyer you are – a first home buyer, investor, home builder, refinancer, or debt consolidator. In most of these situations, you can borrow up to 105% of the property’s value. The extra 5% will cover stamp duty and other added fees that buying a property incurs.
Of course, these amounts vary from lender-to-lender, so you’ll need to do your research before taking out a guarantor loan. You also need to be aware that not all lenders offer guarantor loans, so shop around to find the right lender for you. If you’re unsure, contact a mortgage broker, who can explain your options and help you with your loan application.
What are the benefits of a no deposit home loan?
Guarantor no deposit home loans enable you to:
- Borrow the full property purchase price without needing a deposit or incurring Lenders Mortgage Insurance (LMI).
- In some cases, you’ll be able to borrow enough to also cover the fees so that you won’t have added expenses.
- You can remove the guarantee after you’ve paid off more than 20% of the home’s value.
- Secure a lower interest rate.
Do I need genuine savings to secure a no deposit home loan?
While guarantor loans enable you to borrow the full property purchase price, in most cases you will still need to have some genuine savings to qualify for the loan. Usually, 5% or more of the property value counts as authentic savings. Some lenders may also consider at least three months of regular savings, banking a weekly amount, as enough to meet the criteria for a no deposit home loan. Additionally, many lenders also classify the payment of rent as genuine savings because it’s a regular payment made by you that proves you’re able to manage your finances.
Can I buy an investment property with a no deposit home loan?
Most lenders will consider owner-occupied guarantor loans. However, only a handful are interested in investment guarantor loans as they typically represent a more significant risk. While several of these lenders will consider a single investment property, most are not interested in multiple properties. So if you’re looking to build a portfolio, you may need to consider other options.
When the guarantor secures multiple properties, they are assuming the risk. Yet, the borrower makes all the profit by collecting the rent generated from the properties. As a result, a lender views a guarantor loan on multiple properties as being over-exposed to the financial threat for the investment to be practical.
What types of no deposit home loan guarantees are available?
There are four main types of guarantees available for a guarantor home loan:
- Security guarantee – Also known as an ‘equity guarantee’, this assurance uses real estate as security. The property offered as security is either owned wholly or under a mortgage. If already mortgaged, then a second mortgage covers the portion required as security.
- Security and income guarantee – Friends, acquaintances or family members can secure the loan using a property and their income. While the asset secures the loan, the income proves the loan is affordable.
- Family or parent guarantee – A family member or parent guarantees the loan using their real estate assets as security. Assessment of this guarantee is often done on a case-by-case basis.
- Limited guarantee – This guarantee covers part of the loan, rather than the full amount. As such, the guarantor only provides enough security to cover a part of the loan to reduce their liability.
Is a first home buyer eligible to get a grant with a guarantor no deposit home loan?
In some states, yes, it is possible to have a guarantor no deposit home loan, and still be eligible for both the stamp duty reduction and First Home Buyer Grant. However, you’ll need to check your eligibility before applying for the loan.