No-deposit home loans may seem like an impossible dream in this market. Current conditions for borrowers and for lenders may appear tight when you read all the headlines but the world has not stopped.
Before the Global Financial Crisis no-deposit loans were just another mortgage product. They were used by people who had not saved the 20 per cent deposit that traditional lenders require before offering a mortgage and buyers who can demonstrate that they have the capacity to service the mortgage.
Pity the poor souls in the USA who are now being dispossessed of their homes after being sold unaffordable mortgages, many of them no deposit home loans. Of course many of those borrowers were not suitable applicants for any home and many purchased houses that were over-valued in the first place.
No deposit home loans do exist but they may require a guarantor for the deposit component of the mortgage. The guarantee is limited to the amount of the deposit. This is very significant as it gives peace of mind to the borrower. Further, all the guarantor requires is to have sufficient equity in their own home.
Each mortgage lender will have their own criteria but, in theory a no deposit loan requires a guarantor, for example a parent or sibling, or a guarantee limited to the 20 per cent deposit requirements.
If for example you are purchasing a house for $350,000, the normal deposit required would be $70,000. For first home buyers who will be eligible for stamp duty concessions and the Governments First Home Buyers Grant, the buyer can in fact with the help of a no deposit home loan secure the home with literally no deposit.
The no deposit loan can be a win-win for everyone. You can finally get into the real estate market and for the guarantor there is limited exposure to risk. Parents acting as guarantor for their children wouldnt have to pay any repayments. Furthermore, the guarantee can be retired at any time and the borrower is not required to pay expensive mortgage insurance.
Theres more to these little understood products: they are not limited to first home buyers. Investors are frequent users of no deposit loans. Deposit bonds can be issued by a lender against for example cash deposits or some of form of funds that the insurer is prepared to accept as security. A deposit bond can be used, where applicable to the lender, for no deposit loans as the deposit required to secure a property. A deposit bond requires another asset that can be used as collateral, for example a house or land.
It works in a similar way to a conventional no deposit loan; the difference being it is usually an investor with other assets, that is, the buyer.
The ability to buy on no deposit is not without its risks of course. The loan repayments need to meet the borrowers capacity to repay. Any deterioration in the value of the home will cause negative equity. That needs to be considered.
So, despite the onset of the GFC, no-deposit mortgages are still available under the right circumstances.