Key Points to Know About How No Deposit Home Loans work
Most lenders will NOT allow you to borrow extra funds – you get only enough to cover the purchase price and fees.
If you’re looking for money to pay off a couple of debts or do some renovations – you’ll get declined by virtually everyone.
Almost every lender will only allow you to borrow enough money to cover the purchase price, stamp duty, and other purchase costs.
That’s all… Unless of course, you talk to the lender that is willing to lend you up to $50,000 for renovations of the home you’re purchasing.
Even when borrowing 100% of everything, most lenders want you to have some savings of your own.
That’s right, even if you’re applying for a no deposit home loan, you might need to show that you’re a good little saver!
Got no savings? Most lenders will say no, despite offering a 100% loan – crazy, huh!
Maximum loan amount will vary between 100-110% of the purchase price (unless you choose the lender that will allow you to borrow $50K extra)
Your lender will have their capped maximum Loan Value Ratio, and you won’t be able to get cash-out for anything.
This means, if you’re exempt from stamp duty – you’ll have to reduce your loan amount, rather than borrow the cash to spend on other things.
Your Guarantor needs to help out with equity – but their Owner Occupied home complicates things.
Lenders don’t want to kick people out of their homes – it gets them on prime time current affairs for all the wrong reasons.
So they want to make sure that the risk of foreclosing on any guarantor to the point that they may lose their home, is almost non-existent.
This requires evidence that the debt can be repaid by means other than foreclosure of the home, should the guarantee be called upon in the unlikely event that you default on the debt. Things like, superannuation, cash, other investments.
You need a Guarantor, but if your guarantor is not working – most banks will decline you.
Your lender will want to make sure your guarantor can support their portion of the debt if they’re stuck with it – this means some lenders just flat-out decline every loan where a retiree or pensioner is involved.
If your guarantor is a pensioner – you’ll need to be extremely picky about which bank you apply to.
A lot of lenders want you to refinance the Guarantors mortgage (you might want to avoid this)
Even if you’re choosing to borrow with no deposit (borrowing up to 110% of the purchase price, you might need to show that you’re a good little saver and have at least a few bucks in the bank).
You must have a close family member willing to act as a guarantor and provide a “Limited Guarantee”.
In both of the below case studies, we provided our clients with an “Advice Document” – that specifically identified the Guarantor requirements. Mum and Dad then had a read, decided to take document to their legal and financial adviser (Solicitor or Accountant) and were advised to proceed.
Guarantees are not as scary as they used to be, and some lenders don’t require any income verification or financial position from your guarantors. AND, they limit the guarantee – so your guarantors don’t have to provide a guarantee for your entire loan – just the portion to cover your 20% deposit shortfall.
So tell mum and dad… They don’t have to gift you any money, they just have to lend you some of their equity…
And it could save you $10-20,000 in Lenders Mortgage Insurance fees (which when added to your loan amount, costs you a LOT more than that over the term of your loan).
How to Avoid Lenders Mortgage Insurance fees…
How Lenders Mortgage Insurance (LMI) works:
- When you have a “small deposit” (less than 20%), the bank considers your loan too risky.
- But they still want to lend you money when you have a smaller deposit…
- The lender will look to remove the extra risk that comes from a small deposit.
- Lender insures your loan (just like we insure cars and houses – to avoid a future potential loss).
- This protects the lender (not you), just in case you default on your loan and they have to sell the house, and the house sells for less than what you owe the bank.
- The LMI insurance fee covers the lender for their loss.
- But you pay the LMI fee.
- If you only have a 5% deposit, the fee is usually 3-4% of your loan amount (it’s EXPENSIVE!)
To avoid Lenders Mortgage Insurance and get a No Deposit Home Loan:
- You need some equity from an immediate family member.
- The lender still wants to keep their maximum loan situation of 80% (explained above), so the 20% shortfall comes from your guarantor.
- So you borrow the 80% against your home.
- And the 20% shortfall comes from the guarantors equity.
The big benefits for you:
- The LMI fee is often $10-20,000. You completely avoid this.
- You are not required to have 5% genuine savings, as required with almost every bank in Australia (when you don’t have at least 10 or 20% deposit).
- It gets you in to a home now, instead of waiting another couple of years.
Case Study 1: Borrowing 100% for First Home Buyer with a Credit Default
- First Home Buyers
- Purchase price $425,000
- Loan amount $425,000
- Paid credit default
- Mum & Dad provided a “Limited guarantee” secured by their house for just $90,000 but didn’t have to provide any income paperwork – very simple process.
- $10,000 savings but used just $2,000 of own funds to cover legal and lending costs.
- No stamp duty for First Home Buyers from 1 July 2017 so total purchase costs were minimal
- Not eligible for First Home Owners Grant, as buying established property.
- Application fee = NIL
- Just a $300 guarantor fee
Case Study 2: Borrowing 105.5% for First Time Investor
- First Time Investor (first time buyer of any property)
- Mum and Dad provided a ”limited guarantee” for $127,500 and provided no income paperwork – a very simple process.
- Purchase Price $500,000
- Loan amount $527,500
- Borrowed enough to cover purchase price and stamp duty
- $5,000 savings but none of own funds used
- Application fee = NIL (that’s $0)
- Just a $200 guarantor fee