Is buying a house with no deposit possible?

For many of us, home ownership is a significant life goal. Owning a home is not only an exciting milestone, it is also a major investment that can increase your net worth and bolster your family’s financial future.

But, amid rising home prices, many Australians struggle to save the funds for a deposit. Most lenders require a deposit of at least 5% of the home purchase price, which can amount to tens of thousands of dollars. If you wish to buy a home but worry about being able to save for a deposit, you’re not out of options. Under certain circumstances, you  may be able to buy a house with little or no deposit. Of course, there are some drawbacks to buying a home this way as well, so you need to consider all the pros and cons before deciding how to proceed.

Can you buy a house without a deposit?

It is rare for lenders to approve a home loan without a deposit, but it is possible. In fact, there are a few different ways you can get approved for a home loan with zero or minimal deposit, including using a guarantor, or taking advantage of a government-sponsored grant. Some lenders will provide a loan with no deposit, but it may come with stricter requirements and higher interest rates.

Before you decide to apply for a home loan with no deposit, consider the benefits and potential drawbacks in order to decide whether it’s the best option for you.

The benefits of buying a home with no deposit

The primary benefit of buying a home without a deposit is that this method removes the barrier to entry into the real estate market for low and middle income homebuyers. The other benefit is time: in the time it takes a prospective buyer to save up enough money for a deposit, home prices can increase dramatically, further delaying the buyer's ability to purchase a home. Without the need for a deposit, borrowers can take advantage of lower home prices before they go up.

How can I get a home loan without a deposit?

Most lenders do not provide traditional home loans without some form of deposit. However, there are a few different ways you can get a home loan with zero or very low deposit. Consider the following options.

A guarantor

One way that you can obtain a home loan without a hefty deposit is to have someone else (such as a parent) act as a guarantor on the loan. If your parents own their home, they can use their property as security on your loan. In this situation, you do not need any savings for a deposit, and you can borrow up to 100% or more of the purchase price. If your parents’ property is worth more than the property you are purchasing by 20% or more, you may also be able to avoid paying lenders mortgage insurance (LMI). In order to qualify for this option, your guarantors must have equity in their property, and they must be employed and working. Retirees are usually not eligible to serve as guarantors.

What happens to my guarantor if I can’t make payments? Traditionally, the guarantor will be liable if you default on your loan. However, some lenders have adopted a “family guarantee.” Under a family guarantee, your parents would only be responsible for an agreed upon percentage of the purchase price should you fail to make repayments. The family guarantee places less burden on the guarantor and makes this a more viable option.

Financial gift

In the eyes of a lender, a deposit in the form of a lump sum financial gift is different from genuine savings accumulated over time. Typically, lenders like to see that you have genuine savings for a home deposit because it indicates financial stability, and suggests that you will be likely to repay your loan. Some lenders will consider a windfall, inheritance, or financial gift sufficient for a deposit even if you did not save the funds yourself.

Equity on another property

If you already own property, some lenders may accept positive home equity in lieu of a traditional deposit. This may be a good option for investors and borrowers who are not first-time home buyers and cannot take advantage of programs intended for first-timers. However, if you still owe money on another property, consider how you will be able to manage two mortgages.

Can the First Home Owner Grant be my deposit?

Yes.

In order to encourage home ownership, state and territory governments have developed programs designed to help people buy their first homes. The amount of money provided by the First Home Buyers Grant and the eligible home price varies by the state or territory in which you live, but generally ranges between $10,000 and $30,000. In some places, the grant must be used toward a new or recently renovated property.

The money you receive through the First Home Owner Grant can be used as part or all of your deposit, depending on how much you receive and the price of the property you wish to purchase.

Eligibility for the First Home Owner Grant

In order to qualify for the First Home Owner Grant,

• you must be an Australian citizen at least 18 years of age. 

• you must not have previously owned a home.

• you need to have committed to buying or building a home to apply for the First Home Buyers Grant.

If you receive the First Home Owner Grant, you must live in the home you purchase within a specified amount of time.

Can I use my superannuation as my deposit?

In some cases, you may be able to use funds from your superannuation before you retire. However, there are usually penalties for accessing your super fund before retirement, so be sure to consult with your accountant or financial advisor first.

First Home Super Saver Scheme

Another option is to take advantage of the First Home Super Saver Scheme. The First Home Super Saver Scheme is a government sponsored program that allows first time home buyers to make voluntary contributions to a superannuation - up to a certain amount - that they can access later and use as a deposit on a home. The superannuation allows homebuyers to grow their savings faster than a traditional savings account.

In order to be eligible for the First Home Super Saver program, you must be an Australian citizen who has never owned property before. You must be 18 years of age in order to withdraw from a superannuation account but you can contribute to one before then.

Things to consider before taking out a no deposit home loan

There are, of course, potential disadvantages of taking out a home loan with no deposit.

1. You may face higher interest rates and higher monthly payments. The higher your interest rate, the more you will pay over the life of your loan. Also, the more you borrow, the more you will have to pay each month.

2. You will likely have to satisfy stricter criteria to qualify for the loan. These include a high credit score, strong employment history and reliable income, and more. The approval process can also take longer and be more involved than with other loans.

3. You’ll still be responsible for closing costs like lenders mortgage insurance, stamp duty and other fees, so even a zero-deposit home loan will require some upfront costs.

4. You could end up owing more than the property is worth if you borrow 100% of the home price and the value of your home decreases.

5. If you use a guarantor, be sure you and your guarantor are fully aware of your financial situation and the risks associated with the decision. If you cannot make repayments on your loan, your guarantor will be financially liable. Needless to say, this can cause financial hardship for your guarantor and damage your relationship.

6. If you’re having trouble saving for a deposit because you are deeply in debt already, taking on more debt might not be the best move - especially if interest rates go up. You might consider paying down or consolidating your existing debt first. Every borrower’s situation is different, so consult with a broker and/or advisor for advice specific to you.

A no-deposit home loan may not be the best option for all buyers, so speak with a financial advisor to be sure you fully understand the pros and cons for your unique situation. An advisor can help you decide whether it is better for you to buy now, or wait and save some more money.

How to increase your chances of being approved for a no deposit home loan

To get a no-deposit loan, you need to meet specific eligibility criteria. You must prove that you are creditworthy and that your financial needs are genuine. You should also be sure that you can repay the money on time. If these factors are met, you may be eligible for a no-deposit home loan.

Creditworthiness

This is one of the significant factors determining whether you will qualify for a no-deposit loan. You must show proof of your income and financial status before applying for one. Your credit score should be over 651. Getting approved for a no-deposit loan will be difficult if it's below this threshold. Other criteria include:

●       You do not have unpaid credit card debts

●       You have a stable work history

●       You should have a steady income, and assets to secure the loan.

●       You must reside in Australia

●       You should have a good history of repaying previous loans

If you are preparing to apply for a low or no deposit loan, there are some steps you can take to increase your chances of approval. First, don’t change jobs too soon before applying. Lenders will want to see a steady history of employment. And, be sure to pay your bills on time to establish a strong record or reliable repayment.

Final thoughts

While zero-deposit home loans are not common practice, there are still a few ways to get a loan with little or no money down. A guarantor loan is the most common way to get a home loan with zero deposit; most other options will require at least a small deposit of 5-10%.

Options for a low or no deposit home loan include:

●       Using a guarantor

●       A financial gift instead of savings

●       Superannuation with help of the FHSS scheme

●       Using home equity as deposit

●       First Home Owner Grant

●       Pay a low deposit and buy lenders mortgage insurance

All of these options come with potential benefits and drawbacks. While a guarantor relationship may be the best option for some borrowers, others might be better off saving up more money for their deposit. A consultation with a professional can help you determine what is best for you in the current market conditions. 

Keep in mind, there are even more options for borrowers who have saved enough money for a modest deposit. For example, the First Home Loan Deposit Scheme (also called the First Home Guarantee) is another government program designed to help first-time home buyers get a home loan with a deposit as low as 5% of the purchase price without having to buy lenders mortgage insurance. 

Typically, borrowers who put down a deposit of less than 20% must pay lenders mortgage insurance; under the First Home Loan Deposit Scheme, the government would act as guarantor for up to 15% of the home price so that the borrower can bypass LMI. Alternatively, the Family Home Guarantee is a government scheme that helps eligible single parents purchase a home with a deposit as low as 2% without paying LMI. Family Home Guarantee applicants do not need to be first-time buyers. Book your first home strategy call with one of our expert team members and let us help you with any questions you may have about buying your first home.