For Australian first home buyers, saving up for a deposit is one of the biggest hurdles when getting into the property market. This is especially so when the average house deposit amount (usually 20% of the property's value) has crossed 6-figures in 2021.
But even though the odds may seem stacked against you, don’t give up your dreams of owning a new home just yet. Legitimate no (or low) deposit paths to homeownership do exist! So you might be able to start climbing the property ladder sooner than you think.
Keep reading to learn more about the pros and cons of these alternative paths to a home loan.
Quick Summary
No deposit home loans
1. Guarantor home loan: A loved one offers home equity as a security for your loan.
2. Gifted deposit: A loved one provides the deposit as a gift.
Low deposit home loan option
4. 5% deposit home loans: Find a lender that accepts smaller deposits.
Other ways to grow your house deposit
5. Use superannuation to pay for part of the deposit.
6. Utilise the First Home Owners Grant government program to pay for part of the deposit.
Guarantor home loan (or 105% guarantor home loan)
With guarantor home loans, it's possible to put up no deposit and have a guarantor pledge part of their home equity that's equivalent to a 20% deposit as security for your loan.
Alternatively, you can also put up a smaller deposit (typically a 5-10%). And the guarantor then "tops up" the rest of that deposit by pledging their home equity to meet the 20% criteria.
In either scenario, the guarantor will be liable for the guaranteed amount secured by their property if you default on (unable to pay) your monthly repayments.
Note that the guarantor is not lending or giving you any money. Their home equity is only at risk if you stop meeting your monthly repayments and the lender can't get the loan amount back from the sale of your home.
Example
You want to purchase a house worth $500,000. Typically, you'd need a deposit that's 20% of the property's value — $100,000 in this case.
With a guarantor home loan, your guarantor can pledge $100,000 of their home equity to cover the deposit.
Alternatively, you can also put up a 5% deposit ($25,000). But you still need an additional 15% ($75,000) to meet that 20% criteria. This sum will come from your guarantor by pledging $75,000 of their home equity to be used as the security on your loan.
How much can you borrow with a guarantor home loan?
The amount you will be able to borrow on a guarantor home loan will depend on your situation. But first home buyers will generally be able to borrow 105% of the property’s value.
What are the requirements of a guarantor home loan?
- Your guarantor must have enough equity in their property.
- Your guarantor typically needs to be a close family member.
- Your guarantor usually doesn't need to have stable employment (but this can vary with different lenders).
Do you pay lenders mortgage insurance (LMI) if you have a guarantor?
Lenders mortgage insurance (LMI) is a one-off insurance fee that needs to be paid by the borrower to protect the lender in case it cannot recover the loan amount. LMI is usually required if the borrower takes out a loan that's more than 80% of the property's value.
In most cases, you won't need to pay LMI when you have a guarantor for your home loan. This is due to the fact that your deposit, along with your guarantor's pledged home equity, will usually be equal to at least 20% of the property's value.
Are there other differences between a guarantor home loan and a regular home loan?
The features you get with a guarantor home loan are pretty much the same as a traditional home loan.
Depending on the lender, you may be able to negotiate fixed rate options where you lock in a set interest rate over a period of time. You might also be offered offset accounts and the option to make repayments early.
Gifted deposit
A loved one may also give you a one-time cash gift for the deposit on your property. But there are several steps in the application process you'll need to go through before being approved for a home loan.
For example, you might have to demonstrate that the money is a genuine gift. Some lenders may also want some evidence of the source of funds. This is to ensure that this money isn't borrowed (e.g. withdrawn from a credit card).
About 60% of all first-time home buyers receive a financial contribution towards their home deposit—so lenders are very familiar with how to assess this as part of an application.
Do I need to show genuine savings?
Genuine savings is money you've personally saved up over time. Lenders usually want to see proof of genuine savings if you're borrowing more than 85-90% of the property value.
Because a gifted deposit is money that comes from someone else, lenders would still like to see proof of your own genuine savings. Genuine savings refers to money that you've managed to save up over a period of time and it shows lenders that you have good financial habits.
Most likely, they'll also assess your overall financial and credit history. This includes your credit score and whether you've paid personal loans or car loans on time. The overall purpose is to assess whether you have the financial discipline to meet loan repayments on time along with their other lending criteria.
Do I pay higher interest rates with a gifted deposit?
Most lenders will offer you competitive interest rates similar to what you'd get with a traditional home loan.
Low Deposit Home Loans Option
It doesn’t have to be all or nothing when it comes to the deposit for your home loan. There are low deposit options where you might still get approved without having to save up for the full 20% deposit.
5% deposit home loans
Some lenders might consider granting home loans to first home buyers who've saved up less than the recommended 20% of the property's value. These are usually called 5-10% deposit home loans. Of course, because you're borrowing more from the lender, your overall cost of taking this loan is higher.
For example, you will need to pay lenders mortgage insurance (LMI) which can add tens of thousands of dollars depending on the value of your property.
Interest rates are also usually higher as the loan-to-value ratio (LVR) goes up with a smaller deposit. The LVR basically helps lenders assess the level of risk they're exposed to when approving your loan application. The higher the LVR, the higher risk the lender is taking.
Key Term
Loan-to-value ratio (LVR)
The LVR is the loan value divided by the value of the property you're buying. The higher the LVR, the riskier the loan is to the lender. This means that the interest rates they offer will also likely be higher.
Pros and cons of 5% deposit home loans
First home owner grant (FHOG)
The first home owner grant (FHOG) (sometimes referred to as the first home buyers grant (FHBG) or first home guarantee (FHG)) is a national scheme that rolled out in July 2000 to help Australians achieve their dreams of home ownership.
It's a one-time payment ranging from $10,000 to $20,000 which can be used to pay part of your deposit.
Note that while this is a national scheme, it's funded by individual states and territories. This also means that the rules and eligibility criteria regarding the grant are different in each area.
But generally, the grant is only open to first-time home buyers and those intending to be owner occupiers. It does not apply to those looking to purchase an investment property.
First home super saver (FHSS) scheme
The government-initiated first home super saver (FHSS) scheme allows you to voluntarily contribute up to $15,000 to your super each financial year.
A maximum of $50,000 can be withdrawn from this contribution to pay for your first home deposit.
Note that the terms and eligibility criteria of this scheme can change and it’s best to consult the ATO for the latest updates.
Other Costs to Consider When Buying a Home
In addition to your deposit and monthly repayments, there are other “hidden” upfront costs you will need to budget for when buying a home.
Stamp duty (a tax charged by the government) is usually one of the heftier upfront costs. But as a first home buyer, you will pay no (or reduced) stamp duty depending on the value of your property.
Check out our stamp duty calculator to work out how much you could have to pay.
Other costs include legal, mortgage registration, and loan application fees — all of which could add up to $10,000-$20,000 for a $500,000 home.
Summary
We've covered the top options for first home buyers looking to own a property with no (or low) deposit. If you don't want to involve loved ones in your loan or pay exorbitant LMI fees, then it's worth exploring
