Everything You Need to Know About No-Deposit Home Loans

Introduction

There are so many different schemes, loans, and investment plans out there that it can at times be overwhelming for first-home buyers. If you’re considering purchasing your first property, you may very well be looking into what types of loans are available for you. Perhaps you have even come across what is called a no-deposit home loan. But do you actually know what a no-deposit home loan is, it’s risks and rewards, and if it is right for you? AA Finance Solutions has all the information you need to know in order to understand what exactly is a no-deposit home loan.

So, what exactly is a no-deposit home loan?

A no-deposit home loan is a kind of loan that lets you buy property even if you don’t have enough money saved for a deposit. In this case, equity is normally given by the guarrantor. Borrowers using this kind of loan often get what is termed ‘a parental guarantee’. This is where equity on the borrower’s parent’s house becomes an extra security that will be used for the no-deposit loan. The maximum amount that can be borrowed is one hundred and five percent of the property’s purchase price. This includes ‘the cost of purchase’, which covers stamp duty, settlement agent fees, government charges, council rates, and more.

Example of a no-deposit home loan

An example of a no-deposit home loan would be a client looking to buy a new home worth $400,000 at new purchase price. Now the cost of purchase for the property is $20,000, which makes the home cost a total of $420,000. Under a no-deposit home loan, the parents of the client – assuming they currently have no loan – take on a $100,000 new loan amount as guarantors. The loan is still under the client. This hundred-thousand dollars is made up of eighty thousand dollars, which is twenty percent of the value of purchase, and twenty thousand dollars in costs). Consequently, the client’s new loan amount is $320,000, and their loan value ratio is 80%. The $320,000 loan is also under the client. In total, the amount borrowed by the client will be $420,000.

Advantages of a no-deposit home loan

There are several reasons as to why a no-deposit home loan might be the best fit for future homeowner. For example, if someone does not have a large amount of money on hand for a deposit, it is a fantastic way to be able to break into the tight property market. It also means those interested in buying property do not have to delay purchasing to create a deposit, which could lead to them missing out on the right property due to rising house prices. Those with a no-deposit home loan also do not have to worry about mortgage insurance.

The disadvantages of a no-deposit home loan

On the other hand, it is important to be aware that the amount being borrowed is one hundred, to one hundred and five, percent of your home’s worth. If the value of the property goes down or the client does not pay the mortgage quickly, the client could end up over-leveraged on security. This is where the mortgage is higher than the value of the house. Furthermore, choosing to have a parental guarantee puts parents at risk. For example, if the client couldn’t pay back their new house, the bank would sell it and hold the client’s parents liable for the money they had guaranteed. In the example used, it would be one hundred thousand dollars. In addition to this, the client’s parents would not be allowed to modify or sell the property without permission from the bank. Lastly, if the value of the client’s or parent’s home goes down, the client may not have enough equity to pay off their home loan. They may even require cash to pay the equity and to not go beyond their loan limit.

Tips and tricks

It is important to remember that as such large amounts are being borrowed, clients must demonstrate strong servicing. Moreover, if a client’s parents are considering utilising their equity, it is important a lawyer speaks to them. On a similar note, clients should plan for an exit strategy in case things go wrong and they want to release their parents from the guarantee. One of the most important pieces of advice of all is to – in the first place – purchase a property that will rise in value. This will hopefully lessen the risk of the mortgage overtaking the value of the property. If you or someone you know has any concerns about no-deposit home loans, it is crucial to speak to a mortgage broker like AA Finance Solutions.

AA Finance Solutions has created a handy checklist so that you can keep in mind all the key information concerning no-deposit home loans.

• Parents act as guarantors rather than the client providing a deposit.             
• A no-deposit home loan is an easy way to get into the property market.
• If things go wrong, it can put parents who are guarantors at risk.
• Buy a property that is expected to rise in value if you want to lessen the risk.
• Make sure you have an exit strategy and that the guarantors speak to a lawyer.
• Ask a mortgage broker for advice.

Keep these important points in mind when you start thinking about which loan might best suit you.

Conclusion

Hopefully this blogpost from AA Finance Solutions has helped answer some of your questions concerning no-deposit home loans. However, if you still have any questions or are considering purchasing a property, feel free to reach out to our friendly team.

Ultimately, buying a property is a uniquely personal experience, and so is the loan that will help you to purchase your dream home. Our experienced financial advisors can be contacted for a free consultation at (+61) 433 068 970.

If you’d rather speak face-to-face, simply drop by our office on a weekday for a coffee and a chat about your financial wellbeing. AA Finance Solutions is open between nine in the morning and six in the evening, Monday to Friday.