If you aren't able to save the standard 20% for your home loan deposit, a no deposit home loan with a guarantor might be an option
If you don't have a deposit for a home but still want to enter the property market you may still be able to do so with a guarantor loan. These are loans which allow your parent or close family member to guarantee a portion of your loan using their property as security. If getting a guarantee from a family member is out of the question, the only other option is a 95% home loan, meaning you'll still need to save 5% of the property value. Keep in mind, however, that you'll still have to pay lenders mortgage insurance (LMI) in this case.
No Deposit Home Loan with Guarantor
NAB Choice Package Home Loan - 2 Year Fixed (Owner Occupier P&I) First Home Buyer Special
No Deposit Home Loan with Guarantor
Use the NAB Choice Package Home Loan - 2 Year Fixed (Owner Occupier)First Home Buyer Special and use a guarantor with your home loan to save on deposit and LMI.
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Comparison of 90-95% max LVR home loans that allow guarantors
The deposit that is required on most home loans is usually around 20% of the value of the property. While this figure may vary between providers this is the most common amount required for the deposit, and to avoid lenders mortgage insurance (LMI). If you're willing to pay LMI you can borrow as much as 95% of the value of the property, meaning you'll only need to save 5% for a deposit. Keep in mind that borrowing more than 80% of a property's value can come with higher interest rates in some cases, and that LMI can add thousands to the cost of your home loan.
What is a no deposit home loan?
Industry Experts: Former Aussie General Manager of Marketing and Products Stuart Tucker, Kim Wight and Neil Manual define and share some insights around Low and No Deposit Home loans.
Stuart Tucker : Low-deposit loans can be difficult. If there's zero deposit, there's really very little option, unless there's some kind of cross-equity or maybe a guarantee from a family member using cross-collateralisation of another asset.
Kim Wight : A family guarantee is where your parents will give a limited guarantee, usually 20% of the purchase price of the property plus costs, plus stamp duty.
Neil Manuel : No-deposit home loans nowadays are generally fairly difficult to obtain. Once the GFC hit, there were a lot of changes with regards to lending policies and so on, and 100% home loans were looked at as a fairly high-risk type lend. In saying that, we do offer 95% home loans. They're not difficult to obtain. They're just like obtaining any other loan. All that's required from you is to have 5%.
Stuart Tucker : Five percent deposit, there's definitely loans in the market from a lot of lenders in that area, but the main thing is, can you afford the loan?
Neil Manuel : Take the time, make the effort, and save yourself up a 5% deposit. That proves to us and that shows us that you do have the ability to save money, which also shows us that you will have the ability to pay off your mortgage.
Stuart Tucker : We would recommend everyone to build up at least a 10% deposit. If you can't get to that stage, then there's plenty of lenders that will look at you for 5%, but zero deposit loans, they're not good for anybody.
Saving a deposit for your home can be a significant hurdle, especially for first home buyers or young people who are renting and trying to get into the property market. A no deposit home loan will eliminate the need for a deposit and will allow you to borrow the entire property value. These are only possible with a guarantor. A guarantor is a family member who uses their own home as security for your loan.
How does a guarantor no deposit home loan work?
In most cases a no deposit home loan is the same as a regular home loan, with the only difference being that you've sought a guarantee from a parent or family member to borrow 100% of the property value. 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 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 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%.
Important: You'll noticed we touched on the fact that 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. If you're thinking of getting a guarantor loan, or of being a guarantor, make sure you know the risks and get your own financial and legal advice first.
Lenders mostly restrict this to be a borrower's parents or other immediate family members, but some lenders can accept guarantees from grandparents, siblings, uncles, aunts and more. Each lender will have their own policy regarding guarantors, so it's best to call to find out what that is, or use a mortgage broker who has a good knowledge of these loans.
How to compare no deposit home loans
Choosing a no deposit home loan is similar to choosing a standard home loan since the features are the same.
Flexibility. Consider your financial situation and determine whether it will be stable in the short or long term. It’s important that your home loan can change according to your future financial needs. Features such as a redraw facility and unpenalised extra repayments can give you more flexibility.
Guarantor flexibility. All lenders will have different terms and conditions concerning who, what, where and how your guarantor is going to fund your loan. Make sure you read all the fine print to match your personal and financial situation with your guarantor.
Features. Don't forget about comparing home loans based on their features. Know which features you'll use, and if there are any fees attached to them. For example, some loans might offer offset accounts but will charge monthly fees.
Ongoing fees and comparison rate. Most loans have fees and charges on a monthly and annual basis. When comparing loans make sure you compare the true cost, not just the cost on the advertisement. The comparison rate is the true cost of the loan. It includes both the interest rates and the fees associated with the loan. It takes into account the amount, loan term and repayment frequency but excludes government charges.
Accessibility. For many borrowers, a no deposit home loan is an attractive option for those who do not have the funds to contribute towards a mortgage or a deposit amount. This provides greater accessibility of the property market.
Minimum required savings. Generally no savings are needed to qualify for a no deposit home loan given that you satisfy all other criteria as stipulated by the lender. In many cases, you can borrow the full purchase amount plus the money needed for the upfront costs of buying property.
Cost savings. With a no deposit home loan, you can save on the cost of lender's mortgage insurance (LMI) as the guarantor will allow you to borrow with a high loan-to-value ratio (LVR) above 80%.
Suitability. A no-deposit home loan is suitable for many types of borrowers including investors and owner-occupiers.
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. This is because the lender will need to evaluate the security and financial situation of your guarantor.
Restrictive. Some Australian lenders impose restrictions on no deposit or guarantor home loans and this type of mortgage may not be available for self-employed borrowers.
While finding a guarantor is the most common strategy used by borrowers who can't raise a deposit, there are a few other ways to fund a home loan deposit.
Personal loan as deposit
Most lenders require 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.
Be aware, though, that most traditional mortgage lenders require genuine savings, and many personal loan lenders will not fund a loan for the purpose of a home loan deposit. While it is possible to find lenders to fit both these scenarios, you may find yourself paying higher interest rates as a result.
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 most lenders require genuine savings, some are willing to offer home loans without a genuine savings history and will accept deposit funds as a result of a gift or monetary windfall. However, this may limit the number of lenders open to you as an option as most traditional lenders require genuine savings history.
Self-managed super funds
Self-managed super funds, or SMSFs, can be used to fund property purchases. However, SMSF property purchases can only be for investment purposes, not for owner-occupied properties. For a full discussion of SMSF property investment, read our guide.
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).
Frequently Asked Questions
What if none of these options work for me?
There are no lenders in Australia that currently offer no deposit home loans without a guarantor. There are a few ways to help improve your chances of obtaining a home loan such as saving for a 5% deposit and improving your credit history.
Do I need any proof of savings for a no deposit home loan?
No you don’t always need proof of savings if you have a guarantor but if you’re in any other situation it is recommended that you have around 5% to cover the upfront costs such as stamp duty, LMI and application fees.
How is LMI calculated?
Every insurer/lender has a different way of calculating their LMI premium. As a general rule, you can expect a loan of $500,000 to be around 3.5% of the loan amount, which is $17,500.
Can I avoid LMI?
Yes, your parents must be a guarantor for your loan but please note that this may not be available through all lenders.
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