Buying without a deposit

The rapid increase in property prices over the last 10 years has led to a housing affordability crisis in Australia. New entrants to the property market are finding it increasingly difficult to finance both the initial deposit and the ongoing mortgage repayments.

Traditionally buyers would arrive at their bank with a 20% deposit and a host of documents at the ready to beg for a mortgage from a smug bank manager. Thanks to deregulation and the emergence of non-bank lenders such as building societies and credit-unions, buyers are now the ones dictating terms to the establishment.

Nowadays it is possible to borrow over 100% of the value of the property, including all establishment fees and charges, allowing you to own your home far sooner than ever before. That said, lenders charge some pretty stiff rates for this convenience by way of mortgage lender's insurance and a host of other fees and charges. The result is that over the life of the loan you end up paying significantly more interest than if you had instead put down a deposit and reduced both the principal borrowed and interest rate levied on your loan.

Who might use a no-deposit loan?

Some borrowers will be facing rapidly rising house prices, or be paying a high rental and not be in position to save for a deposit. Other borrowers will be re-entering the property market after a relationship breakdown and asset-split. Investors will commonly use no-deposit home loans to leverage into the market, where the intention is to sell the property at a profit a short time later.

Pro's and Con's

We've prepared the following list of pro's and con's to help you assess a no-deposit home loan. Use it to help you assess the merits of no-deposit home loans against your personal circumstances.

Pro's of buying property without deposit

  • Own your own home sooner! No need to wait until you have saved even a 5% deposit.
  • In a rapidly rising housing market, it allows you to get in sooner and benefit from appreciation in the value of your property.
  • You can still access a number of benefits associate with standard-rate loans, such as redraw facilities

Con's of buying property without a deposit

  • Because you are borrowing more, you end up repaying more by way of interest.
  • Because there is less equity your property, and equity is essentially the margin between market value and the loan, your lender has less security should you default and they be required to sell your property at a reduced price to reclaim the lent funds.
  • The lender will charge you a higher interest rate as compensation for this risk. However, do your research and you may be able to find a great deal, and maybe pay less than their standard variable rate. It all depends on the other options you choose.
  • If housing prices recede and the value of your property falls below the mortgage value, you will essentially have 'negative-equity'. The lender may move to reclaim their security unless you can find some extra cash to pay down the mortgage to an acceptable level.

Who is eligible for a no-deposit home loan?

Lenders will apply higher debt-servicing ratios when assessing applications for no-deposit home loans. This means that no-deposit home loans are more suited to applicants with high-incomes and strong credit history.

Also remember that you will probably need at least some money to buy a home without a deposit. There are a host of other fees and charges involved in buying a house, including legal fees, conveyancing fees, pest and building inspection reports etc.

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Published on July 7-th, 2007 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.

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Not all providers in the market are included in the comparison.

Any information or advice contained on this website is general in nature and has been prepared without taking into account your objectives, financial situation or needs.

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