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
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. You need to have a family member who owns their own home and can use it as security to cover your deposit. Read on to learn more about no deposit mortgages and start comparing loans.
Comparison of 90-95% max LVR home loans that allow guarantors
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What is a no deposit home loan?
Guarantor loans 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 5% deposit home loan, meaning you'll need to save 5% of the property value and your lender will lend you the remaining 95%. Keep in mind, however, that you'll still have to pay lenders mortgage insurance (LMI) in this case.
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's no deposit home loanDan 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.
Who can be a guarantor?
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.
Pros and cons of no deposit home loans
- 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.
Some other types of no deposit home loans
What if you can't find a guarantor for your home loan? There are still ways to get a no deposit, no guarantor home loan, but they can be significantly trickier.
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).
Questions you've had
- What if none of these options work for me? There are no lenders in Australia that currently offer true no deposit home loans. You'll either need a guarantor or at least a 5% deposit. Check out our guide for advice on how to save a deposit.
- 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. Genworth has an LMI estimation calculator on its site which can give you a good idea of what you can expect to pay.
- Can I avoid LMI? If you have a guarantor who can bring your total loan-to-value ration to 80% or below, you won't have to pay LMI. Please note that guarantor loans may not be available through all lenders.