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DEPOSIT
It used to be that lenders required a 20% deposit for a home loan. But these days, lenders will typically accept 5% or even no deposit Home Loan and include some or all your fees in the loan.
UP to 95% home loans
Provided you can make the payments, you can typically finance up to 95% of the property value from the lender on their normal competitive terms. Some may then offer to add the mortgage insurance costs to your loan as well, therefore lending you up to 97% of the property value. With the cost of real estate these days, it is not unusual for first-home buyers to have less than a 20% deposit. Investors might simply want to minimise deposit and maximise gearing benefits.
100% Home Loans or No-deposit Home Loans
If you haven’t got a deposit, but have a good income, a no-deposit home loan could be for you. You can borrow 100% of the purchase price of a property, provided you have saved enough to pay for legal and transfer fees, stamp duty, insurance other costs.
With 100% home loans, provided you pass slightly tougher approval rules, lenders will waive the need for you to have a deposit and you just need to cover your costs (this type of loan is really not for someone who has no money at all). In this category, there is less choice in terms of product. For instance, you would find lenders who offer a variable or a fixed-rate loan, but you probably won’t be able to get cheap introductory rates or lines of credit.
Who do no-deposit home loans suit?
Lenders generally apply a slightly higher debt servicing ratio (the level of debt you’re carrying compared to your income) to no-deposit home loans. They are ideal or people with a good income ad credit history who, for different reasons, maybe pay high rent and have not been able to save for a deposit. No-deposit home loans are great for first-home buyers because they help people enter the housing market before prices rise beyond their reach, especially when house prices have been rising faster than the average person’s ability to save. They are also often attractive to investors wanting to maximise their gearing for taxation purposes or income return.
Do I pay a higher interest rate on no-deposit loans?
Maybe. Different home loan products have different pricing structures, so you will need to find the one which works best for you. Depending on which lender and loans works you choose, the interest rate you pay may even be lower than the lenders standard variable rate. You will however almost definitely have to pay lenders’ mortgage insurance.
PRO’S AND CONS OF NO- DEPOSIT HOME LOANS
PRO’S
You can buy property sooner, as you don’t have to wait until you save a 5% deposit. The loans often come with the features such as additional repayments and redraw facilities,.
CON’S
NO-deposit home loans have stricter lending criteria, and approval can be harder. You can also only get them on certain types of properties, and in certain locations (lower risk profile properties). In essence, you’re borrowing more money, so you’ll end up paying more interest in the long term. You’ll also have to pay either a higher interest rate or pay more mortgage insurance. It is important to be aware that, if the real estate market drops, the risks you face are potentially higher than everybody else, in terms of affordability and the amount of equity you have in your home. Realistically though, lenders have no interest in their borrowers getting into “negative equity” positions. In other words, a borrower’s house would be worth less than their loan and the temptation for the borrower to just hand over the keys and walk away would be high in a negative-equity situation. That would clearly not be the objective of any lender.
You will need some funds
Just remember, even though lenders and brokers advertise loans for “no-deposit” home loans, you will probably have to contribute some of your own finds to cover additional costs involved in the purchase (e.g. solicitor’s fees, stamp duty).