Buying a house with no deposit

Buying your first home with no deposit may sound like a dream come true – but do ‘no deposit’ home loans exist?

Saving up a home loan deposit can be a long an arduous task. But what if there were ways to buy a home with a low deposit – or even no deposit at all?

In this article, we’ll cover the ways in which you can potentially secure a home loan while having no deposit or a low deposit, as well as the pros and cons of doing so.

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Is it possible to buy a home with no deposit?

Yes, in some circumstances it’s possible to buy a home while having no deposit, althoughit’s not a common scenario. Low deposit home loans are much more common than no deposit home loans.

However, lenders may consider no deposit home loans on a case-by-case basis – provided you can meet their conditions. The most common way to buy a home with no deposit is to get a guarantor home loan.

What is a guarantor home loan?

A guarantor home loan is when a third party (usually a family member) uses some of their own home equity to secure a home loan for another person. If you get a guarantor, you can potentially borrow up to 100% of a property’s value.

Their equity must be enough to cover at least 20% of the new property’s value. The lender would then take out a home loan over the guarantor’s property until the guarantee expires or is removed.

In the case that the borrower of the loan is unable to make their home loan repayments, the guarantor may be liable to pay. So, there is sufficient risk to getting someone to guarantee your home loan.

Once the value of the guarantee has been paid off, or the home’s value has increased to a point that it meets the bank’s lending standards, the guarantor can be removed from the loan.

Before jumping into a guarantor loan, it’s a good idea for the borrower and their proposed guarantor to speak to a financial advisor.

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How to get approved for a guarantor loan

Lenders still have strict standards for borrowers taking out a guarantor loan. You must be able to show evidence that you:

Have a stable job with consistent income
Have a good credit score and positive credit history
Have the ability to repay the entire loan with your own income.

Guarantors must also be able to show that they have a good credit history and sufficient equity in their home(s).

Can the First Home Owner Grant be my deposit?

Many states in Australia have what is known as the First Home Owner Grant. These grants, which can range from around $10,000 to $20,000 – depending on the state – can help eligible first home buyers own their first owner-occupied property sooner.

The First Home Owner Grant was introduced to help buyers enter into the unaffordable housing market, but can the grant be used as a deposit?

The answer is yes! Most of the time, the First Home Owner Grant can be put towards your deposit. However, it’s important to remember that the grant is unlikely to cover a 20% home loan deposit.

In Australia’s capital cities, the median house price is around $1,065,447. A 20% deposit would come to over $200,000.

While you may not need to actually reach the 20% deposit mark, you’ll find it hard to get a home loan for even a $400,000 with a deposit of just $10,000.

There are also some strict points of criteria to the grant, including property price caps. In most states, the grant is only available to use on newly built properties or for building your own home.

Nonetheless, the grant can still be a big help for those eligible. Check how it works in your state or territory here. Don’t forget that your deposit is only one of the upfront homebuying costs. You must also cover:

Stamp duty
Home loan application and service fees
Moving costs
Conveyancing fees.

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Other ways to buy a home with no deposit

While a guarantor loan may be the more common type of ‘no deposit home loan’, you may be able to buy a home with no deposit through:

Equity you have in another property
A monetary gift.

So, if you own another property and have sufficient equity in it, you may be able to use this equity as security to purchase another home without saving up for a deposit.

If you receive a substantial gist of money (e.g. from your parents, an inheritance or through winning the lottery), you may be able to put this towards a deposit. However, since you didn’t save up these funds yourself, not all lenders will accept the funds.

You will likely still need to provide some evidence of genuine savings as well as having a good financial record.

What are the pros and cons of buying a home with no deposit?

Pros

Buyers with low savings can find a way to buy in a less affordable property market.
Buyers with equity in an existing property who lack genuine savings can use their equity as a deposit for a new home loan – especially to invest.
By the time you save up for a deposit, property prices may have risen.
It gives you the opportunity to buy your dream home if it appears.

Cons

For deposits under 20%, Lenders Mortgage Insurance is usually charged.
Some lenders may charge higher interest rates if your Loan to Value Ratio (LVR) is too high.
The more money you have to borrow, the more interest you’ll pay.
Higher risk for entering negative equity if borrowing 100% of the purchase price.
The approval process for no deposit loans can be extensive and will require a lot of supporting documentation.
Potential for borrowers to experience financial stress due to taking on such a large loan.

Can I get a home loan with a low deposit?

A low deposit certainly gives you more home loan options than having no deposit.

If your deposit will be under 20% of the purchase price of the property, there may still be plenty of lenders willing to lend to you – depending on your deposit size.

However, you are likely to be charged Lenders Mortgage Insurance (LMI). LMI is designed to protect the lender for when they lend to borrowers with lower deposits.

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How the Home Guarantee Schemes could help you get a low deposit home loan

Introduced in the Morrison government’s 2022 Federal Budget, and agreed to by the current Labor Government, the Home Guarantee Schemes offer buyers with low deposits an entry into the property market.

Note that these are not ‘no deposit’ home loan schemes, but rather low deposit. You’ll still need to front up some money for a deposit, but not as much as is usually required.

What is the First Home Guarantee?

The First Home Guarantee was previously known as the First Home Loan Deposit Scheme. It’s a scheme designed to help first home buyers buy a home with a deposit as low as 5%.

The government guarantees the remaining 15%, giving lenders the security to approve low deposit first home buyers without having to charge them LMI.

Between 1 July 2022 and 30 June 2023, there will be 35,000 First Home Guarantee places available. The eligibility criteria are as follows:

Applicants must be Australian citizens and at least 18 years old
Applicants must be first home buyers (including your partner, if buying the home as a couple)
You can apply as a single person or as a couple if you are married or in a de-facto relationship
Single applicants may have an annual taxable income of up to $125,000
Couples may have a combined annual taxable income of up to $200,000
The scheme is for those who intend to be owner-occupiers.

You can purchase any type of residential property, including:

A newly built home
An established house, townhouse or apartment
A house and land package
An off-the-plan home
Land and a building contract to construct a home.

Here are the property price caps:

property price caps for first home guarantee FHBG: NSW, VIC, QLD, TAS, WA, SA, NT, ACT, Jervis Bay Territory and Norfolk Island, Christmas Island and Cocos (Keeling) Islands

What is the Regional Home Guarantee?

The Regional Home Guarantee works the same way as the First Home Guarantee. However, there are an additional 10,000 places specifically available to regional home buyers.

Like the First Home Guarantee, you can buy a home with a deposit of just 5%, while the government will guarantee the remaining 15%.

The main difference is that you don’t need to be a first home buyer to apply for the Regional Home Guarantee, but you can’t have owned land in the last 5 years.

What is the Family Guarantee?

The Family Home Guarantee is targeted at single parents wanting to purchase a home with a low deposit. You don’t need to be a first home buyer but can’t currently own a home.

With the Family Guarantee, you only need a deposit of 2% (at minimum), with the government guaranteeing up to the remaining 18%. Between 1 July 2022 and 30 June 2023, there are 5,000 places available in the scheme.

The eligibility criteria are as follows:

Applicants must be single, meaning they can’t be married or have a de facto partner. If previously married, you must be divorced to be considered single
You must have at least one dependent child
You must not currently own a home
All residential properties are eligible.

The same price cap thresholds as the First Home Guarantee apply. You can use the postcode search tool to find out the price cap in your location.

If you have no deposit or a low deposit, you may still have home loan options. Book an appointment with your local FND Broker to learn more today.