Are you looking to get your first home loan but don’t have a deposit? Learn more about your options here with Savvy
Fact checked
Are you dreaming of owning your first home, but don’t have a deposit for your mortgage yet? Don’t worry, as there are ways to buy a house with no deposit. Most lenders do ask for a deposit of at least 5% of the cost of the property you wish to buy, but zero deposit home loans do exist.
Read on to find out more about no deposit home loans for first-time buyers. Savvy can help you find a loan that is just right for your personal needs by comparing a range of offers across all the areas which matter most to you, so you’ll have a better chance of getting the best deal possible.
One of the best zero deposit home loan options for first-time buyers is what’s called a 105% guarantor loan. This involves a guarantor (usually parents or close relatives) offering their house as security for the loan so you can borrow the whole cost of your new home with no deposit.
The reason it’s called a 105% guarantor loan is because the lender offers you a loan of the full price of the home you want to buy, plus 5% extra to pay for all the costs associated with buying a house (such as stamp duty, which you can calculate here with Savvy's Stamp Duty Calculator.)
To qualify to be a guarantor, your parents or relatives must:
The term ‘home equity’ describes the difference between what a property is worth and how much is owed on its mortgage. For example, if your parents’ home is worth $700,000, but their outstanding mortgage principal is $300,000, they have $400,000 in equity. It is this equity they can use as security for your new home loan.
Using a term deposit as security
As an alternative to using their home as security, your parents could offer a term deposit as a guarantee. A term deposit means you give your money to a bank or lender for a set period, and receive interest on this amount whilst it’s deposited with the bank. This term deposit can also be used as security for another loan, provided it is a sufficiently large sum to cover 20% of the value of the property you wish to purchase.
For example, if you want to buy a home that costs $500,000, your parents would need a term deposit of at least $100,000 (which is 20% of your purchase price of $500,000). For the time this term deposit is used as security for your loan, your parents can’t withdraw this money or use it for another purpose without refinancing the home loan.
Provide 20% equivalent security to avoid LMI
If your guarantor provides at least 20% of the value of your new property as security, you will not have to pay Lenders Mortgage Insurance (LMI), which is an insurance cost normally charged by lenders if you can’t provide a 20% deposit. LMI is often costly and can add thousands of dollars to the cost of buying your home, so this may be a worthwhile saving.
An alternative option for getting a home loan with no or a low deposit is asking relatives for a gift of 5% of the value of your new property instead of standing as a guarantor. You could then apply for government first home buyers’ assistance to cover the remaining 15% of your deposit.
If you don’t have family to act as a guarantor and you’re not a high-income earner, though, it may be worthwhile saving up until you do have at least a 5% deposit and taking advantage of government first home buyer’s assistance. You’ll have to pay LMI to enable you to get a home loan with a low deposit if you can’t access government assistance, rather than trying to buy a house with no deposit.
Asking relatives to act as your guarantor could enable you to get into the housing market far sooner than saving for years to get a deposit. The sooner you get your first home loan and start paying it off, the sooner you’ll own your own home.
LMI protects the lender should you be unable to make your home loan repayments and can amount to thousands of dollars. For example, on a $500,000 loan in South Australia with a 15% deposit, the LMI charge would be in the region of $5,500.
If your parents are prepared to support you by acting as a guarantor, you could be eligible for a home loan with a very attractive low interest rate. Savvy can help you compare low interest home loans which allow guarantors to find one that suits your particular needs.
A guarantor mortgage can also help you consolidate any debt you may have, such as personal, store, car or credit card debts. You can take out a slightly larger home loan and use the remaining funds to clear off all your existing debt.
If house prices are rising rapidly, getting into your first home with a guarantor mortgage can see you increase your home loan equity quickly. For example, if you buy your first home for $350,000 and six months later it’s worth $375,000, you’ve gained an extra $25,000 in equity on top of the principal paid down in that time.
If your home does increase in value, or if you’ve paid off the equivalent of 20% of your home’s value, you can refinance and ask your lender to remove your guarantor to allow you to stand on your own two feet and relieve them of the responsibility of acting as security for your loan.
Getting a home loan for the full cost of your new home, or even 105% to help with buying costs or to consolidate, will likely mean you start your financial life with a larger debt than if you’d waited a few years and saved up a deposit. You’ll pay more in interest on a larger loan, potentially costing tens of thousands more overall.
If your parents do agree to act as a guarantor, they will have an additional mortgage over their house, so they won’t be able to refinance their loan without it affecting yours too.
If you become unable to pay your home loan, the responsibility for payment will fall to your guarantors. Your lender will ask them to make loan repayments on your behalf. If they’re unable to make the repayments, in very rare circumstances their home may be at risk (assuming they’ve offered their home as security for your no- or low-deposit mortgage).
Should your parents wish to sell their house and downsize, or buy an investment property, they are more restricted in what they can do if their existing home loan equity is being used as security to guarantee your loan.
Quantum Savvy Pty Ltd (ABN 78 660 493 194) trades as Savvy and operates as an Authorised Credit Representative 541339 of Australian Credit Licence 414426 (AFAS Group Pty Ltd, ABN 12 134 138 686). We are one of Australia’s leading financial comparison sites and have been helping Australians make savvy decisions when it comes to their money for over a decade.
We’re partnered with lenders, insurers and other financial institutions who compensate us for business initiated through our website. We earn a commission each time a customer chooses or buys a product advertised on our site, which you can find out more about here, as well as in our credit guide for asset finance. It’s also crucial to read the terms and conditions, Product Disclosure Statement (PDS) or credit guide of our partners before signing up for your chosen product. However, the compensation we receive doesn’t impact the content written and published on our website, as our writing team exercises full editorial independence.
For more information about us and how we conduct our business, you can read our privacy policy and terms of use.
© Copyright 2024 Quantum Savvy Pty Ltd T/as Savvy. All Rights Reserved.
