Home ownership is the dream of many Australians, but taking that first step onto the property ladder is now harder than ever. The current housing affordability crisis puts many properties out of the reach of first home buyer budgets. And spiralling rents make it increasingly difficult to save for a deposit without significantly impacting on lifestyle. As a result, many young people put their dreams on hold and delay buying their first home until well into their 30's.
To assist first home buyers overcome these difficulties, many lenders now offer no deposit home loans. A no deposit home loan enables the purchaser to borrow up to 100% of the purchase price of the property, without affecting eligibility for the First Home Owners Grant or first home buyer duty exemptions. The borrower simply needs to be able to afford the repayments and have funds available to cover the transaction related costs such as legal fees, any statutory charges, mortgage insurance costs and the cost of a deposit bond, if required.
To help understand how a no deposit home loan works, here's a simple example: Say Andrew wants to buy a $350,000 property. He'd usually have to save a minimum 5% deposit (or $17,500) and show evidence of a savings history. Because he's borrowing over 80% of the property valuation, Andrew would normally have to pay mortgage insurance. On this loan amount this would typically be over $6,000. In addition he would have to pay other fees such as legal costs and possibly stamp duty (in some States first home buyers are exempt). Straight away, we can see they he is going to need over $25,000 just to get started.
However, with a no deposit home loan Andrew doesn't need to save a deposit, or demonstrate a savings history. Plus he can use his First Home Owners Grant, or a gift from family, towards his remaining costs. This means he can now afford to stop paying rent and buy his first home faster.
So for want-to-be first home buyers stuck in the rental trap, a no deposit home loan offers a flexible alternative.
Whilst many lenders now offer no deposit home loans, it's worth shopping around and checking out what's on offer, as products do vary. For example, some lenders charge the borrower a higher interest rate for a no deposit home loan than on a more traditional home loan, where a 5% or more deposit is paid. Equally some lenders restrict the borrower taking out a no deposit home loan to just one or two home loans choices, which may not be best suited to the borrower's circumstances. So when it comes to choosing a lender, a little research can pay big dividends.
Nothing in this article should be construed as investment advice. For advice on home loan refinancing consult a home loan professional.