You need to have a family member who owns their own home and can use it as security to cover your deposit. Banks won't give you a normal home loan with no deposit. You could save up a 5% deposit, but if this isn't feasible you may still get into the property market with a guarantor loan. It's not an option for every borrower. Read on to learn more about no deposit mortgages and start comparing loans.
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How does a guarantor no deposit home loan work?
Guarantor loans are loans which allow your parent or close family member to guarantee a portion of your loan using their property as security. Following the global financial crisis (GFC), these loans are the only way to buy a home with no deposit.
In most cases a no deposit guarantor home loan is the same as a regular home loan. This means that you can compare most types of loans, including those with fixed or variable rates. Other features offered include extra repayment options, offset accounts, redraw facilities and more. The way the guarantee works is also simple. Let's use an example to show how it would work.
Dan's no deposit home loan
Dan wants to buy a property worth $500,000, and has a very small deposit. His parents agree to become guarantors for his loan, and guarantee 20% of the property purchase, which is $100,000. Dan uses his own small deposit to pay for the other upfront costs associated with purchasing the property, while his parent's guarantee serves as the deposit.Dan's parents are responsible for the portion of his loan they guarantee. This means if Dan failed to make his repayments and ultimately defaulted on his loan, his parents would be liable for $100,000.
Dan works hard paying off his loan, and in five years, has paid $100,000 from his loan. At this point, he applies with his lender to remove his parents as guarantors from his loan, and they're no longer responsible for him in the event he defaults on his loan. Because he didn't have to pay LMI either, Dan also saved as much as $15,000 if he had saved up a deposit of 5%.
Choosing a no deposit home loan is similar to choosing a standard home loan since the features are the same. You'll want to look at the rates, fees and features. However, you'll also want to compare each lender's policy on guarantors.
All lenders will have different terms and conditions concerning who, what, where and how your guarantor is going to fund your loan. Some lenders also impose restrictions on no deposit or guarantor home loans and this type of mortgage may not be available for self-employed borrowers. Make sure you read all the fine print to match your personal and financial situation with your guarantor.
You'll also want to ask about your lender's approval process. When you apply for a no deposit home loan, the approval process can be lengthy and more difficult compared to that of a traditional mortgage application, because the lender will need to evaluate the security and financial situation of your guarantor.
Some alternative types of deposits
What if you can't find a guarantor for your home loan? You could look at some alternative ways of supplying a deposit.
Personal loan as deposit
Most lenders require at least 5% genuine savings, which means they will want to see evidence that your deposit comes from a pattern of saving. Some lenders, however, offer home loans without genuine savings. If you have a high enough income to afford two loan repayments and have good credit history, you may be able to get a personal loan to cover the cost of a home loan deposit. However, taking out a personal loan will impact your home loan borrowing capacity.
Monetary gift or windfall
If you've received a large monetary gift or have come into some money as a result of a windfall, you may be able to use this money as a home loan deposit. While you could seek out a lender that doesn't require genuine savings, if you hold money in your account for three to six months most lenders will consider it genuine savings.
If you already own a property, you can use the equity in your property as a deposit for another property. Equity is the difference between the amount your property is worth and the amount you owe on your home loan. Most lenders will let you use up to 80% of the equity in your property as a deposit, and some will allow you to use up to 95% if you pay lenders mortgage insurance (LMI).
Low deposit home loans
If you can't find anyone to serve as a guarantor, you'll need to save a deposit. Fortunately, many lenders offer loans with as little as a 5% deposit. This will see you paying LMI, but you'll also be able to get into the housing market quicker. You can compare low deposit home loans in the table below.
Marc Terrano is the lead publisher of Points Finder and a co-host of the Pocket Money podcast. He was previously a writer and publisher for home loans at Finder. Marc has a Bachelor of Communications (Journalism) from the University of Technology Sydney. He’s passionate about creating honest and simple reviews and comparisons to help Australians get the best value for their money.
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