Low and no deposit home loans are possible, in some cases.
In Australia, a home loan obtained with only a 5% deposit is generally what's referred to as a low deposit home loan, whereas no deposit home loans are those achieved with 0% deposit or 'no deposit'.
Low or no deposit home loans are often difficult to obtain due to the additional risk for lenders. In a loan with a larger deposit, if the borrower defaults the lender can recoup some of their costs via that deposit. With low or no deposit home loans, the amount they can recover is often much smaller.
This is why home loans of this type are often more difficult to obtain. However, they are still possible. Here are 7 ways to obtain a no or low deposit home loan.
Alternatively, for details on how we could help you to get a suitable home loan, see our home loans page.
1. Use a friend or family member's equity for your deposit
One option which people can use requires the help of someone who owns their own property. Typically a parent, sibling, spouse or close friend—someone who is willing to 'gift' you a portion of their home's equity.
In this event, this party will use some of their home's equity to cover your deposit.
For example, if your parents have $150k equity in their home, they could pull $20k from it and gift it to you in order for you to cover your 5% deposit on a home of $400k.
2. Secure your loan against a guarantor's property
This option is only to be undertaken with caution. However, in some cases, it can be an effective solution.
One way of getting a loan without a deposit is by securing your home loan against another's property. That person is often known as a loan guarantor.
Your guarantor owns a property and puts it up as collateral for if you default on your loan. They then sign a loan agreement with you and your lender, making them jointly responsible for the loan.
As stated above, this option is to undertaken with caution, as should you default on your loan your guarantor (often a family member) and their property is on the line.
3. Sell assets to cover your deposit
What do you have that you could live without? In some cases, people can sell a number of assets in order to raise enough capital to cover the 5% deposit which is needed to apply for a low deposit home loan.
These assets could include a:
While this option does require that you sacrifice some luxuries, many find it a worthy trade for the chance to own their own home or investment property.
4. Use a personal loan to cover the deposit
A personal loan is a finance product which can be used to cover a range of expenses, including shortfalls in cash. They are available with fixed or variable interest rates and are typically unsecured.
Subject to affordability, an applicant could use a personal loan to raise the capital required to cover the 5% deposit. The drawback of this, of course, is that the applicant will then have two loans to repay.
5. Find a co-borrower
If you cannot raise the capital for a deposit by yourself, you may be able to use a co-borrower.
A co-borrower is someone who signs onto your low deposit home loan with you. They are then jointly responsible for the loan with you. They will also become part owners of the property.
Co-borrowers are often a spouse or partner. But, they can also be a sibling or other family member, close friend or fellow investor. However, it's important to remember that because your co-borrower is also responsible for the loan, should they default you are liable too.
6. Set up a special savings account
One of the best ways of obtaining a low deposit home loan is also the simplest.
Set up a special savings account and put in a portion of your earnings every week. Add temporary windfalls such as work bonuses or tax refunds. Top up with any other funds you may acquire such as inheritances.
It'll take time, but eventually, with hard work, discipline and a few compromises you may be able to save enough for your home deposit.
7. Use a mortgage broker
Lenders don't offer low or no deposit home loans in all instances. Other lenders don't offer them at all.
Whichever option on this list that you choose, a mortgage broker, such as one of the specialist team at Rapid Finance, could help you to find the right lender and loan for your circumstances. They could also help you to prepare your case for finance.
Our loans specialists work with finance every day. They can guide you through the home loan application process to help you to get a loan that is suitable for your situation.
"Finding a no or low deposit home loan isn't always easy, but it may be possible."
At Rapid Finance, we are your Australian specialists in home loans and home finance. Every day we help home buyers to find loan products that match their individual circumstances.We may be able to help you too.
For more information regarding how to secure a low deposit home loan or arranging no deposit home loans, speak with one of our friendly team today.Learn more on our home loans page or call 1300 467 274