Buy a home with a small deposit and enjoy repayments which won’t change during the fixed term.
No deposit or 100% home loans are rare in Australia after the global financial crisis. Today, they’re offered by a small number of lenders and generally only through a family guarantee, where a family member offers part of their property as security for your loan. There are many low deposit fixed rate home loans available - these will allow you to borrow with as little as a 5% deposit.
What is a fixed rate no deposit home loan?
This type of loan is one which doesn’t require borrowers to have any of their home loan deposit saved, and also has a fixed rate. In Australia, these types of loans are not typically available without a family guarantee, but low deposit fixed rate home loans are generally available from a wide range of lenders. These types of loans suit borrowers who might have the income to service a loan but not the required deposit.
How do fixed rate 100% home loans work?
When lenders offer a home loan to borrowers they prefer that each borrower has at least 20% of the property value saved in the form of a deposit. This means they will only need to borrow 80% of the property’s value, and will therefore have 20% equity in their home already. This means if property values decrease and their share of equity falls, they’ll more than likely still own a chunk of their home outright. Australian property prices are expensive, so not every borrower will have the ability to save a 20% deposit for their home. Lenders recognise this, so offer a range of home loans which allow borrowers to borrow with a deposit of as little as 5%, or in the case of no deposit home loans, 0%. Because these borrowers have a higher risk than borrowers with a 20% deposit, interest rates can be higher, and lenders take out a form of insurance called Lender’s Mortgage Insurance (LMI) to protect themselves. Unfortunately it’s the borrower’s responsibility to front the bill for this LMI premium.
What are the types of fixed rate low or no deposit home loans available?
Just like a regular fixed rate home loan, a low deposit home loan is available from a variety of lenders including banks, credit unions and building societies, and can come in a number of different types:
|Full-featured home loans||These loans come with a large number of features and incentives, such as offset accounts, additional repayment options and redraw facilities, but as a result can have higher fees and rates.|
|No frills or basic home loans||This type of loan comes with a small number of features and extras, but to compensate borrowers comes with lower fees and interest rates.|
|Package home loans||If you want to package a home loan, transaction account and a credit card, then this type of loan can be beneficial. Package loans generally come with interest rate discounts and fee waivers, but will charge an annual fee.|
How to compare fixed rate low and no deposit home loans
It’s not difficult to compare fixed rate home loans with low deposit requirements. As these loans can have higher interest rates and fees these features should be compared first.
- Interest rates. The interest rate will have a large bearing on your repayments each month, so be sure to compare rates. Also note that the comparison rate is a mandatory rate lenders have to include which includes some of the fees borrowers will have to pay. Compare this to the advertised rate, and if there’s a large discrepancy, be sure to find out why.
- Fees. As with any other home loan, a home loan with a low deposit will come with fees. These include application fees, valuation fees, settlement fees and legal fees. Some home loans might waive these, so be sure to be mindful of this when comparing.
- Features. Fixed rate home loans can still come with a variety of features, including 100% offset accounts and the ability to make additional repayments during the fixed term, as well as the ability to use the loan to build a property. They might also come with the option to take your loan with you to a new property if you sell your old one, otherwise known as loan portability, and might come with mortgage repayment holidays in the event that you need to take a break from repayments for an important reason.
Pros and cons of a no deposit fixed rate home loan
- Borrow close to the entire amount. Having a fixed rate no deposit home loan comes with the option of lending 100% of the purchase price of the home. Even a home loan with a low deposit requirement, such as a 95% fixed rate home loan, will only require a deposit of 5% of the property value.
- Get into your home sooner. Fixed low deposit home loans can see you purchase a home without first having to save a large deposit, which for many is a barrier of entry into a home.
- Repayments won’t change. Because this type of loan is fixed, your repayments won’t change during the fixed term.
- You’re safe from interest rate rises. Interest rate rises won’t affect a fixed rate home loan, as the rate will not move during the fixed term.
- Requires a guarantor. A 100% fixed rate home loan will require you to have a family member sign as a guarantor. This means if you can no longer make repayments for any reason, the responsibility falls to the guarantor. They are usually required to provide a guarantee using their property, so there’s a higher risk with this type of loan.
- LMI costs. You may have to pay LMI when taking out a home loan with an LVR above 80%. This can come with high costs.
- High exit costs. Fixed rate home loans have high exit costs if you leave during the fixed term.
- Less flexibility. A fixed mortgage generally doesn’t come with the range of features offered on a variable rate home loan. This means there are not as many home loans which offer offset accounts and almost no fixed rate home loans will allow borrowers to make unlimited additional repayments during the fixed term.
Things to avoid about fixed rate no deposit home loans
A no deposit fixed rate home loan will require a guarantor, so it’s wise to seek professional advice before applying for one. Failing to make you repayments could see your family member lose their home, so it’s wise to talk your strategy over with a broker or financial advisor first. Also note that because this loan is fixed, you should have a good idea about if you’ll remain in your home for the length of fixed term. If you plan to sell your property during this time, you could be up for hefty break costs.