Cost of Buying A House

Despite the changes in home loan availability, you can still literally buy a house with no deposit at all, but it is important to understand the costs involved in doing so. Most people save a 20% deposit because with a 20% deposit, you can completely avoid having to pay any lender's mortgage insurance (LMI). There are however at least three X Inc lenders who will allow a 15% deposit without charging you mortgage insurance under certain circumstances.

Up to 95% Home Loans

Provided you can make the payments, you can typically finance up to 95% of the property value from a 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 and 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 products. 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 for people with a good income and 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.

"To buy our first home we had to borrow a large sum of money with very little savings. Sandra Crossland took the time to explain all the options open to us and was always there to answer our questions before we bought our first home."

L & H Maxwell, Rouse Hill

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 loan you choose, the interest rate you pay may even be lower than the lender's standard variable rate. You will however almost definitely have to pay lenders' mortgage insurance.

Pros and Cons of No-Deposit Home Loans

Pros

You can buy property sooner, as you don't have to wait until you save a 5% deposit.
The loans often come with features such as additional repayments and redraw facilities.

Cons

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 for 100% or No-Deposit Home Loans

Just remember, even though lenders and brokers advertise loans for "no-deposit" home loans, you will probably have to contribute some of your own funds to cover additional costs involved in the purchase (e.g. solicitor's fees, stamp duty).