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No Deposit Home Loans
No deposit home loans should really be called low or minimum deposit home loans, as you will be required to stump up at least five per cent of the purchase price. Your home loan lender will also expect you to cover extra costs, such as stamp duty and upfront fees.
Still, not having to scrimp and save as much as might be typically required for a hefty deposit could help you realise your dreams of home ownership much faster. But there are a few things you need to watch out for.
To help you decide if it’s the right option for you, here’s the lowdown on low deposit home loans.
What is a low deposit home loan?
You may be able to purchase a property with no deposit if someone – typically one or both of your parents – is willing to act as a guarantor. This means they provide your lender with a limited guarantee supported by a first registered mortgage or second ranking mortgage over their property. They would then be liable for an agreed, guaranteed amount of your loan if you defaulted on your repayments.
If this is not an option, you may want to consider a low deposit home loan, which could potentially allow you to borrow up to 95 per cent of the purchase price of a property. This type of loan was all the rage in the pre-GFC glory days, before all but vanishing as lenders tightened their purse strings during the credit crunch.
These days, it’s not easy to get a low deposit loan – you’ll have to meet strict criteria, including proving that you have a strong employment history, a reliable income and the minimum deposit necessary.
Who do low deposit home loans suit?
Low deposit home loans are popular among first-home buyers who are unable to save a large deposit to purchase a home. Property investors who want to maximise their negative gearing benefits may also be interested in this type of loan.
Can I avoid paying Lenders Mortgage Insurance?
Lenders will generally charge you Lenders Mortgage Insurance (LMI) when your deposit is less than 20 per cent of the total purchase price of the home you’re buying.
However, some lenders may allow you to borrow up to 90 per cent of the total purchase price of the home before charging LMI, depending on your profession, the industry you work in, and an array of credit assessment variables.
It’s important to note that LMI is there to protect your lender in case you default on the loan and it’s not going to do you any favours if you can’t meet the repayments. With low deposit home loans, the cost of LMI can run into the thousands.
You may be able to avoid paying LMI on a low deposit home loan if you have someone acting as guarantor. They will need to have sufficient equity in their home loan so they don’t incur LMI when supporting the guarantee.
Check out our guide to Lenders Mortgage Insurance for more information.
What are the pros and cons of low deposit home loans?
The main advantage of a low deposit home loan is that it offers an opportunity to purchase your own home sooner, without wasting money on rent or having to live with your parents.
However, as mentioned, low deposit home loans are also notoriously difficult to qualify for – and the final decision doesn’t necessarily lie with your lender.
There are two stages of approval: first the lender must approve the loan, then the mortgage insurer needs to approve the loan. During the application process, your lender and the mortgage insurer will thoroughly scrutinise your financial history, and you may find it hard to get approved if you are self-employed or don’t have a high income. If you do succeed, your lender may restrict you to buying in certain postcodes as advised by the mortgage insurer.
To find out if you may qualify for a low deposit home loan, call 13 19 20 to speak with one of our qualified mortgage brokers.