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No Deposit Home Loans For First-Time Buyers

Are you looking to get your first home loan but don’t have a deposit? Learn more about your options here with Savvy

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, updated on August 8th, 2023       

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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.

How do I get a no deposit home loan as a first-time buyer?

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:

  • have sufficient equity in their property (and be prepared to use this equity as security), OR
  • have substantial savings and place this cash in a term deposit which is used as security
  • they must be prepared to provide your lender with information and financial proof that they qualify as guarantors
  • they must be working or have a regular income
  • their property or term deposit must be in Australia

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.

What other options do I have if I don’t have a deposit or a guarantor?

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.

Pros and cons of no deposit guarantor home loans

PROS

Break into the housing market sooner

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.

Avoid having to pay LMI

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.

Get the lowest interest rates

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.

Buy a home and consolidate debt

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.

Take advantage of rising house prices

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.

Refinance to remove guarantor in the future

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.

CONS

Pay far more in interest

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.

Parents will have another mortgage

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.

Guarantors are responsible in case of default

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).

Moving house becomes more complex

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.

More answers to your questions about no- or low-deposit mortgages

Can I use a personal loan as a deposit?

Yes – however, you should seek advice before you take this route as it means you’ll have to pay off the personal loan and your home loan at the same time. This option is also only permitted by a few lenders and will increase the amount of interest you’ll pay overall, meaning it’s not always the best decision.

Do no-deposit home loans take longer to process?

Yes – it may take a little longer than normal for your lender to process a no-deposit guarantor loan, as there are more background checks required.

What will lenders accept as security from guarantors?

Lenders almost always need equity in a property or cash as security.  In rare cases, they will sometimes accept business equity or other assets of value as security. However, property is the most common security utilised.

Is 105% the maximum I can borrow with a guarantor as a first home buyer?

No – provided your guarantor has sufficient equity to cover your loan, it’s possible to borrow 110% or even up to 120% or more of the value of your new home, provided there is plenty of security available.  The amount you can borrow is determined by the amount of equity your guarantor has available to use as security and your repayment ability.

How will my home loan affect both my and my guarantor's credit scores?

As long as you make your home loan repayments on time, your credit score is likely to increase and your guarantor’s credit history will not be positively or negatively affected.  However, if you default on your home loan, or don’t pay your bills on time, your financial association with your parents could negatively affect their ability to get credit in the future, and your own credit rating will suffer too.

Is there any other help available for first home buyers?

Yes – there is plenty of assistance available for first home buyers. The federal government has the First Home Loan Deposit Scheme, which guarantees up to 15% of your deposit, while most states offer stamp duty concession and exemption schemes. These vary and change regularly, so check your state government website for current details.

Can I limit how much my parents will be responsible for if they go guarantor?

Yes – your parents or guarantors can offer a limited guarantee (up to a set amount), so their liability is limited to their specified limit in the event that you are unable to pay your mortgage.  This means when you’ve paid off that set amount you can release them as guarantors.

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