How to Buy a House Without a Deposit?

The monthly Consumer Price Index (CPI) indicator saw annual inflation of 6.8% in August 2022; the biggest contributor in the 12 months to August was new dwelling construction, up 20.7%. These ABS figures indicate that some home buyers may find it challenging to save a deposit and enter the property market.

On the bright side, there may be loan options that’ll make your purchase easier. For example, with a bit of research, you may be able to access a home loan with little or no deposit.

Here’s a look at some ways to navigate the deposit challenge and buy your own home.

What’s the Minimum Deposit for a House?

Generally, Australian lenders accept 20% of the total property value as a reasonable amount for a deposit. The higher your deposit, the smaller your loan, and the less interest you’ll have to pay. It’ll also take lesser time to pay off.

If your loan-to-value ratio (LVR) or your borrowing exceeds 80% of your purchase price, you’ll need to pay Lenders’ Mortgage Insurance (LMI).

Can You Buy a House Without a Deposit?

It’s not all that common. As a general rule, there are no 100% home loan products from any traditional lenders. However, having a guarantor improves your chances of securing a no-deposit home loan.

At the same time, most lenders consider applications on a case-by-case basis for no-deposit home loans. This includes stringent eligibility requirements and, almost certainly, a higher interest rate.

In short, no-deposit loans may not suit every type of borrower. It’s therefore advisable to put down at least a 5% deposit.

Do Lenders Offer 100% Home Loans?

Some specialist lenders may offer their versions of 100% home loans. However, this is not very common as lending no deposit, 100% home loans are high-risk.

Therefore, you’ll typically need to meet tight lending criteria related to your:

1. Credit History: You should be able to show a high credit score with either Equifax, Illion or Experian, Australia’s main credit reporting agencies.
2. Employment: If you’re seeking a no-deposit home loan, you’ll have to provide evidence of stable employment, genuine savings and a stable financial situation. Moreover, it would be best if you had a suitably high income that allows you to repay your loan.
3. Timely Repayments: You must also show you are responsible and make debt and loan repayments on time. This includes your credit card and personal loans.

Here we’ll provide a rundown on how you can potentially buy a property with no deposit.

Guarantor Loan

For a guarantor loan, someone (usually a family member) consents to make repayments if you cannot do so. The guarantor will likely need to show evidence and documentation that they can repay your loan if you cannot.

The applicant’s parents or immediate family members mostly step in as guarantors. Nevertheless, some lenders may also accept aunts or uncles to become your guarantor.

Guarantors enjoy a fixed liability. In addition, they can also choose how they secure the guarantee. For example, some may secure it with a term deposit, and some offer their equity in an existing property in Australia as security on the house.

As you begin paying off your loan amount and/or your property value increases, you can request the relevant credit provider to release your home loan guarantor. This happens once the borrower has paid off more than 20% of the loan.

Benefits

Guarantor loans are one the most suitable ways to access no-deposit home loans in Australia. They are ideal for unstable or seasonal employment and low incomes who cannot save a deposit. They are also suitable for borrowers with a bad credit history.

The benefits include:

1. Access 105% Home Loans: Some lenders may permit you to borrow up to 100% of the property value of your parental guarantor in Australia. Sometimes you may even get a loan up to 105% of your property purchase price. This would include the entire cost of the loan and additional costs, for example, stamp duty and application fees.
2. Avoid LMI: If your guarantor offers a guarantee worth more than 20% of the value of your property, LMI may get waived off, thus enabling you significant savings.
3. Competitive Interest Rates: In many cases, interest rates are significantly low since the guarantor makes the loan less risky for the lender.
4. Preferred by Lenders: Many lenders prefer guarantor loans as this category of home buyers tends to pay their loans on time. Therefore, your loan is more likely to be approved if you have a guarantor.

Limitations and Risks

1. More Expensive: If you bring in a guarantor to avoid LMI while taking on a high LVR, the home loan may work out costlier as you’ll have to pay interest on a more significant portion of the property’s value. Instead, saving up a 20% deposit, which would help you avoid LMI in the first place, may be a more viable option.
2. Affect Relationships: If you default on your loan repayments, it could strain your relationship with your guarantor as they will be held responsible for repaying the debt. If need be, your guarantor may even have to sell their home to repay the loan amount.
3. Impact Credit Score: If you don’t meet your repayments, you and your guarantor’s credit report could be negatively impacted. This will limit their ability to access credit in the future.

Leverage Existing Equity

If you have sufficient equity in your home or other investment properties, you can use it to pay a deposit on an investment property. Some lenders may allow you to access up to 95% LVR on your owner-occupied home and up to 90% on an investment property.

A suitable way is to get your home valued and possibly refinance. Then, when you determine how much equity you can leverage, you can take it out to use as a deposit on another property.

Benefits

1. No Savings Required: The equity option is ideal for those with sufficient equity. They do not need to use any savings at all.
2. Cashback Offers: You can check out potential cashback offers when you refinance your loan balance
3. Autonomy: Leveraging your existing equity to get a home loan without a deposit will give you complete control over your purchase. Moreover, it’s a practical way to use your existing assets to climb the property ladder and gain home ownership.

Limitations and Risks

1. LMI Costs: If you’re borrowing above 80% of the property’s value, it will attract significant LMI. So do your research for the purchase to be worthwhile.
2. Property Market Dynamics: The equity value may fluctuate based on market conditions. So, you’ll need to ensure the market is good when you’re looking to buy.

First Home Buyer Grants

The First Home Owner Grant (FHOG) is a national scheme funded by the states and territories and administered under their legislation. It entails a one-off grant payable to eligible first homeowners.

To qualify for the First Home Owners Grant, you must be an Australian citizen or permanent resident, at least 18 years old. Furthermore, you must occupy the property as your principal place of residence for at least 12 months after settlement or completion of construction.

Benefits

1. Ideal for First Home Buyers: The grant provides vital financial assistance to first home buyers as they receive a lump sum payment ranging from $10,000 - $15,000 to buy a property.
2. Straightforward Process: In most cases, the participant bank or credit union providing you with finance will lodge the application form on your behalf. This is a relatively straightforward process.
3. Exemptions and Concessions: Depending on your state or territory, you may be eligible to receive, more than one exemption, concession or reduction from stamp duty for your property. This can be a significant saving, particularly if you’re also a first home buyer.
4. Suitable for Regional Areas: FHOG handouts are ideal for most rural and regional areas of Australia, as the median house price is generally lower than the eligible property value criteria.

Limitations and Risks

1. Strict Eligibility Criteria: Property purchased on behalf of a trust or company is not eligible for the grant. Likewise, if you have previously received the Grant from any jurisdiction within Australia, you cannot reapply.
2. Amount Handout Variation: The amount handed out varies across states and territories as they are funded at the state level. Also, at present, it is not available in the ACT; it has been replaced by the new Home Buyer Concession Scheme (capped at $35,910 for the year 2021-22).
3. Property Type and Thresholds: Strict property value thresholds in most states restrict buyers’ eligibility in expensive locations and capital cities, including Sydney or Melbourne.
4. Furthermore, only purchases of newly built homes that have never been lived in before or significantly renovated existing properties can access the grant.

Low Deposit Home Loans

Likewise, government schemes like the First Home Guarantee Scheme (FHBG) and Regional Home Guarantee Scheme (RHG) can help eligible home buyers access a low-deposit home loan with as low as a 5% deposit without LMI.

In addition, the Family Home Guarantee (FHG) is another national scheme provided by the Australian Government pitched at single parents with at least one dependent child. If eligible, you can purchase a home, regardless of first home buyer status, for as little as a 2% deposit without paying LMI.

If you’d like to know more about state-wise amounts handed under the First Home Buyer Grant and other low-deposit home loan schemes for first home buyers, read our blog First Home Buyer Grants 2022.

Using Super

Under the First Home Super Saver (FHSS), if you’re a first home buyer, you can apply to access your voluntary concessional (pre-tax) super contributions and associated earnings. These funds can be used to purchase your first home. However, they are subject to concessional tax rates similar to standard superannuation.

Per the scheme, you can apply for a maximum of $15,000 of your voluntary contributions from any one financial year in your eligible contributions to be released. The maximum overall contribution amount is $50,000.

The ATO advises that you apply for the release of your FHSS money around the same time you start applying for a home loan, i.e. when you see your mortgage broker or banker for pre-approval.

Benefits

1. Potential Tax Savings: The main benefit of the FHSS is that it enables you to take advantage of the favourable tax treatment applicable to super savings. The higher your tax slab, the better the benefits. Saving in your super is thus better than committing in your savings account because of the low tax rate.
2. Access to Associated Earnings: Along with the amounts you’ve contributed to your super, you can also draw out the earnings from your contributions. This can add up to a tidy sum, which can be used towards the purchase price of your home.

Limitations and Risks

1. You May Need to Borrow More: Given that you’re only able to access a limited amount of your super under the FHSS scheme, you may need to supplement this with other savings or borrowings to come up with the required deposit.
2. Restrictive: You must get your FHSS determination before signing the property contract. Then you’ll need to request the release of funds within 14 days to avoid the extra tax. This can be restrictive and potentially delay your home purchase.
3. Moreover, you may need to pay tax on your money released under the FHSS. It is based on your marginal tax rate minus a 30 per cent offset.
4. Proper Planning Required: Since you can only contribute $15,000 each year towards the maximum release amount, you must plan how to use this scheme in advance. Also, if the money is released and you don’t buy a home, you will have to pay additional taxes to keep that money. Alternatively, you will have to redeposit it in your super.

Using a Personal Loan

One way to navigate the deposit challenge is to use a personal loan as a home deposit. In most cases, you can submit your home loan pre-approved once your loan gets approved. Your personal loan may be advanced before your home loan. This enables you to put in the deposit when signing the contract of sale.

For high-income earners, a few thousand dollars in savings may be accepted. However, you may need a 5% deposit if you earn a lower income. The reason being your lender will take your personal loan repayments into account when calculating your borrowing power for a home loan.

Some lenders do not require genuine savings and may permit a borrowed deposit. Nonetheless, you may need your own funds to cover stamp duty and other expenses. If you fall short of personal savings, then it’s unlikely that you’ll get approved.

Our Stamp Duty calculator can help you to estimate how much you’ll need to pay in stamp duty on your property purchase. You can also use our free Home Loan Comparison calculator and other online calculators to compare different loan repayment scenarios and find one that best suits your needs.

Benefits

1. High LVR: You can borrow up to 95% of the purchase price of your new house while using the personal loan as a deposit.
2. Lower Repayment on the Personal Loan: In many instances, taking a personal loan will cost you less in interest. The reason is that a personal loan is for a very short term and is only for a small part of your total debt. Therefore, the higher interest rate doesn’t impact as much as it would have your entire home loan been at that rate.

Limitations and Risks

1. Treated as High-Risk: The personal loan as the deposit is not a preferred pathway when applying for a home loan, as many lenders treat it as a high-risk case.
2. Difficult to Get a Personal Loan: Many lenders do not offer personal loans if they are taken to be used as a deposit on a home loan.
3. Very Strict Eligibility Criteria: You have to qualify for both a home loan and a personal loan. Therefore you need to earn a very high income, have a good credit history and have comparatively low debt. In addition, you’ll be assessed based on your savings too.

Joint Ventures

You can also purchase property as a tenant in common. This means each partner owns a share of the property as a percentage. Nonetheless, any lending on the property is jointly owned by all parties. Thus, if one partner stops paying their share, the others will still be responsible for the entire debt.

For this purchase type, you should trust the persons you’re entering business with. Ensure you have a written agreement that covers aspects related to accountabilities for day-to-day decisions on property matters, dispute settlement and what happens if a partner wants to sell their stake.

You’ll also need to ensure that the agreement clearly outlines the threshold amount a partner can spend on needs such as repairs without approval from the co-owners.

Benefits

1. Pooling of Resources: Joint ventures enable you to get together with people you trust, pool resources, and share risks jointly. This allows you to advance on the property ladder much faster than you would if you were going alone.
2. Increased Borrowing Power: When you go in as a group, your borrowing power is increased. This means that you can purchase a more expensive property than you could on your own.

Limitations and Risks

1. Shared Decision-Making: You’ll need to learn to share the decision-making regarding your property. This can be difficult for some people, as they may want complete control over their assets.
2. Shared Liability: You and your co-owners will be jointly liable for the debt on the property. So, if one of you stops making repayments, the others will still be responsible for the entire debt.

Receive Your Deposit as a Gift

You could take an informal loan from your parents and pay it back over time. Alternatively, you could use your inheritance, or your family members could provide a cash gift to pay your home deposit. In this case, you don’t have to pay anything back.

A gift between 5 and 15% of your house value will help you get your foot on the property ladder.

However, when assessing your application, your lender may ask if the money provided by the family was a gift or loan. Your answer may influence the lender’s decision if you could get a home loan.

Benefits

1. Avoid Costly LMI: By paying some money towards your deposit as an informal loan, you may get a 20% deposit and avoid paying lenders’ mortgage insurance.
2. Faster Home Ownership: Where you have received an interest-free informal loan, or full gift or inheritance, you can pay off your loan quicker. More importantly, you’ll be saving thousands on interest repayments.

Limitations and Risks

1. Chances of Getting Refused: Many lenders want that if you only have a 5% deposit, it should comprise genuine savings. However, receiving money from a parent or third party as a gift is not considered genuine savings. Therefore, in the lender’s eyes, you may appear to be a high-risk borrower, and your application could get rejected.
2. Legal Documentation: Your lender may seek a statutory declaration stating that the money is being handed to you unconditionally. If your parents are not agreeable to this, you might have to look at other options.

How Joust Can Help You Find the Perfect Home Loan

If you’re looking for Home Loans with different deposit requirements, Joust’s comprehensive home loan marketplace can help you save time by connecting you with a wide range of lenders.

Our Instant Match technology puts you in touch with trusted lenders who can help you get a great deal on your Home Loan. Our user-friendly platform has helped thousands of Aussie home buyers achieve their property dreams while benefitting from cost-effective Home Loans.

Get started with Joust today and take the first step towards owning your own home.

The information in this article is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.