I have no deposit – can I still borrow?
The short answer is yes, but it’s not easy. Here are some options:
Equity in another property
If you already own another property you can use your equity in that as the deposit for your new property. If you are doing this it may also be a good time to discuss mortgage consolidation.
Many lenders offer an option called ‘family equity’ where a relative – usually one or both parents – acts as guarantor for your deposit. They usually cover 20% of the loan using their equity in their own property or cash held in a term deposit. Using family equity often means that you can borrow up to 105% of the property’s value, which is a great advantage if you are planning to renovate before moving in.
By covering 20% of the purchase price, family equity allows you to avoid the expense of Lender’s Mortgage Insurance (LMI), which can be 1%-3% of the purchase price or even more, depending on the price of the property and size of your deposit. LMI doesn’t protect you; it protects the lender, so avoid paying it if possible.
While using family equity sounds a rough deal for the relative who puts up the guarantee, they can be protected by a ‘fixed liability’ guarantee so they are only liable for the 20% deposit that they have underwritten and not the entire value of the mortgage.
A financial gift
Other options that avoid LMI include accepting a direct financial gift of 20% of the purchase price, again often from parents. Be truthful. Don’t tell the bank it’s a gift if it is actually a loan and do familiarize yourself with the estate planning issues that relate to a gift as opposed to a loan.
Take out a personal loan
You could take out a personal loan to cover the deposit. You will already need to have a small deposit (3% to 5%) as well as a high income and low expenses, a spotless credit history and no other significant debt.
Self-managed super fund
Another option, if you have more than $100,000 in superannuation, is to use a self-managed superannuation fund to buy the property. Your super fund can pay the deposit from existing savings and borrow up to 80% of the value of the property.
A no-deposit home loan
If none of these options is available to you all is not lost, though you will probably need to pay LMI. A ‘no deposit home loan’ allows you to put down a deposit of 5%. The bank will then lend you up to 95% of the property’s value and you will also be borrowing the additional cost of the LMI, which means you will have to pay a little more each month.
Use a broker
All these financing options are complicated and require a thorough knowledge of the marketplace. If you need to use a broker, we can approach the lenders that best match your needs and also help you to present a credible application.
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