No Deposit Home Loans

How do I get a Home Loan with a guarantor?

The main way to get a Home Loan without paying a deposit is to use a guarantor. This is someone – often a direct family member – who guarantees to pay back the loan if you fail to make your repayments.

This is usually a pretty big ask. The guarantor might even have to put down their house as a form of security, meaning the lender could possess and sell their house if you can’t make your repayments.³https://moneysmart.gov.au/loans/going-guarantor-on-a-loan#:~:text=If%20the%20borrower%20can%27t%20make%20the%20loan%20repayments%2C%20you%20will%20have%20to%20pay%20back%20the%20entire%20loan%20amount%20plus%20interest.%20If%20you%20can%27t%20make%20the%20repayments%2C%20the%20lender%20could%20repossess%20your%20home%20or%20car%20if%20it%20was%20used%20as%20security%20for%20the%20loan.%C2%A0 Obviously, it’s not a decision that you or the guarantor should take lightly.

But if you decide to go through with it, how do you go about it? Well, one way to start is by looking at individual lenders. You can often find out on their website whether a no-deposit loan with a guarantor is something they offer. From there, you can set up an appointment with your guarantor and your potential lender to discuss terms, interest rates, and your repayment capability. Make sure to bring along your proof of income and any other pertinent documents, too.

Are there other ways to get a Home Loan?

If you don’t have enough cash for a deposit, don’t lose hope. Other than finding a guarantor for a no-deposit Home Loan, there are some other roads to home ownership. These might include:

• Existing equity: This is one to consider if you already have a property and you’re looking to buy your next one. You might be able to put your equity – the difference between your home’s value and what you owe – towards buying your next property.
• Using superannuation: The first home super saver scheme lets you make voluntary contributions to your super to fund your first home deposit. Changes have been made to this scheme which will come into effect 14 September 2024. You will only be able to withdraw a total of $50,000 across all years. For those who requested a release before 1 July 2022 will be capped at the old limit of $30,000.⁴https://www.ato.gov.au/individuals-and-families/super-for-individuals-and-families/super/withdrawing-and-using-your-super/early-access-to-super/first-home-super-saver-scheme Noting this scheme is only available for a first home purchase and to those who meet the eligibility requirements.

Could a low deposit home loan be suitable for me?

If you’re a first-home buyer struggling to save enough money for a home deposit, a low-deposit Home Loan could be an appealing option. It could also come in handy if you’re in a hurry to buy. For example, if you’ve found a property at a great price and you think the property’s value will only increase over the years, a low-deposit loan could help you jump on a good opportunity with the money you have at the time.

Otherwise, low-deposit Home Loans can be useful for property investors who have money tied up in other investment properties but less money in a savings account. Some property investors also might apply for a low-deposit Home Loan because having a negatively geared property (a property where the rental return is less than the payments they’re making on it) can have tax benefits.

Sounds pretty good. What’s the catch?

If you’re having a tough time saving up for a deposit, getting a Home Loan without a deposit – or with a lower one – might sound great. But there are also a few drawbacks to these loans that might be worth considering. These include:

• Interest rates: Lenders consider the whole picture of you as a borrower when deciding what interest rate to offer you. Unfortunately, this whole picture includes your deposit amount. A lower deposit amount could mean paying higher interest rates.
• Repayments: The lower your deposit, the more you need to borrow, and the bigger the repayments could be. Before you agree to a loan, it’s worth making sure the total monthly payments will be within your budget.
• Lender’s Mortgage Insurance: If your deposit is less than 20% of the property value, you might need to pay lender’s mortgage insurance – an additional upfront payment that you might want to factor into your calculations.⁵https://moneysmart.gov.au/glossary/lenders-mortgage-insurance-lmi

What’s lenders mortgage insurance?

Lenders mortgage insurance (LMI) is a premium that can be added to your Home Loan to protect the lender in case you default on your loan. This is a one-time payment, and how much you pay generally depends on the size of your deposit and how much the bank is lending you. With low-deposit loans, the cost of LMI can run into the thousands. You can choose to capitalise the LMI – that is, include the payment into your monthly mortgage repayments.

As mentioned, lenders will only charge you LMI if your deposit is less than 20% of the total purchase price of your property. But even if your deposit is lower, you can sometimes skip paying LMI if you have a guarantor to sign onto your loan⁶https://www.lendi.com.au/inspire/finance/how-can-i-avoid-paying-lmi/, or if you’re participating in the First Home Guarantee scheme.⁷https://www.housingaustralia.gov.au/support-buy-home/first-home-guarantee#:~:text=This%20enables%20an%20eligible%20home%20buyer%20to%20buy%20a%20home%20with%20as%20little%20as%205%25%20deposit%20without%20paying%20Lenders%20Mortgage%20Insurance

Helpful Tip:

While some lenders may not require a deposit for a home loan, these lenders are few and far between. Additionally, if you do take out a loan without putting down a deposit, this could significantly increase the interest you need to repay over the loan term. Lenders will want to see a history of saving, so building up even a small deposit to put towards your loan principal is a more ideal option . There are also some government incentives available to eligible borrowers with a 5% deposit. At the end of the day, you want the peace of mind that you can manage your repayments, and enjoy living in your new home as long as you wish.

Nicole Jacobs

Co-Founder and Managing Director, WHITEFOX Advocacy

Can any government programs help me get a low-deposit Home Loan?

While saving for a deposit can be daunting, you don’t necessarily have to do it all on your own. Luckily, there are a few government programs designed to help you out. Depending on your state and whether you live in a regional area, there can be different schemes available, so it’s worth doing a search based on your location.

The most noteworthy national schemes are:

• The Family Home Guarantee: Aimed primarily at single parents, this program allows eligible people to purchase a home with as little as a 2% deposit, without paying LMI. The government then acts as the guarantor for the remaining 18%. To apply, you’ll also need to speak to a participating lender.⁸https://www.housingaustralia.gov.au/support-buy-home/family-home-guarantee
• The First Home Guarantee: Designed for first-time homebuyers, this scheme lets you nab a property with just a 5% deposit without paying any LMI. The government takes on the role of guarantor for the other 15%. As with the Family Home Guarantee, applications can only be made through participating lenders.⁹https://www.housingaustralia.gov.au/support-buy-home/first-home-guarantee

Just be mindful that both of these programs have specific criteria and limits. To get the full list of eligibility requirements, you’ll want to speak to a participating lender and see if you qualify.

How do I get approved for a low-deposit home loan?

Lending out 95% of the purchase price of a home can seem like a risky prospect for banks, so they may prioritise borrowers who have a track record of trustworthiness. If you’re serious about applying for a low-deposit Home Loan, these tips might give you a better chance:

Manage your debt

To assess your risk as a borrower, lenders will check your credit rating and any debts you may have.¹⁰https://www.lendi.com.au/inspire/finance/how-a-credit-report-affects-a-loan-application/ In the months leading up to your Home Loan application, consider focusing on minimising your debt and making consistent, on-time repayments.

Save what you can

Even a small amount of savings can help show a potential lender that you’ll be able to budget to make your monthly repayments. If you can, try to put a bit of your income into a savings account each month so you have proof of genuine savings.

Check your borrowing power

Your borrowing power is the amount of money a bank will lend you.¹¹https://www.lendi.com.au/inspire/finance/how-can-i-boost-my-borrowing-power/ Many banks have online borrowing power calculators, which are often based heavily on how much you earn per year.

Lower your credit card limit

If you have a lot of credit cards, or one credit card with a high limit, this could potentially impact your application for a low-deposit Home Loan. Speak to your bank about the benefits of lowering your credit card limit or even cancelling your credit card after you’ve paid off any outstanding debt.

Check your credit score

When assessing your Home Loan application, lenders generally perform a credit check to ensure you have a healthy credit score. Your credit rating gives information about your loan repayment history, past and present credit products and enquiries, defaults, and more.

Lower your credit card limit

If you have a lot of credit cards, or one credit card with a high limit, this could potentially impact your application approval for a low deposit home loan. Speak to your bank about the benefits of lowering your credit card limit or even cancelling your credit card after you’ve paid off any outstanding debt.

Demonstrate stability in your life

This one is up for interpretation, but some lenders might see changing jobs or moving frequently as a bad sign. You may also want to avoid making a large purchase, such as a car, right before applying.

Where can I compare Home Loans?

If you’re thinking seriously about purchasing a new home, it might be worth looking at different kinds of Home Loans, including no-deposit Home Loans. But remember that not all Home Loans are equal. If you need help comparing Home Loan lenders, we’ve partnered with Lendi to make that process easier for you. Compare Home Loans with iSelect and Lendi today!