Zero deposit home loans: Can you get one in Australia?

It won't come as a shock, but house and apartment prices in Australia are expensive. According to CoreLogic’s January 2022 national home value index, the median home value in Australia is just under $720,000 and it’s far higher in cities like Canberra and Sydney.

Based on that median figure, a first home buyer looking to save up the recommended 20% deposit to buy a home would need to save up a whopping $144,000 - no easy feat.

Are there any other options though? There are a few, including low deposit home loans and even zero deposit home loans (if you have a family guarantor) which could allow you to get into the property market sooner. Let’s get into the ins and outs.

As the name suggests, a zero deposit home loan - or no deposit home loan - is a mortgage which requires no upfront commitment from the borrower. Before the Global Financial Crisis (GFC), some lenders did allow first home buyers to borrow without a deposit, but these days the only way you can apply for a home loan without stumping up for a deposit of your own is if a parent or family member is willing to go guarantor on the mortgage for you.

The reason home loan providers allow you to borrow without a deposit if you have a guarantor is because they know if you are unable to meet your home loan repayments and you forfeit on the loan, any money they can’t recover through selling your property can be taken from the portion your guarantor put up as security. That’s why guarantor loans can be risky.

An alternative option is for your parents to help you with the deposit. For example, you could aim to save 5% yourself and then your parents could gift you the money needed for the remaining 15% - making a 20% deposit in total.

Alternatively, some mortgage lenders will allow first home buyers to borrow up to 95% of the value of a property. These are called low deposit home loans because, unsurprisingly, you’ll be borrowing with a deposit under the recommended 20%. Using that median home value of $720,000 as an example again, instead of needing to save up the not inconsiderable sum of $144,000 for a 20% deposit you would only need $36,000 for a 5% deposit.

If you’re purchasing your first property as an investor, keep in mind you may not be eligible for a low deposit loan, as many lenders only offer 5% deposit loans to owner occupiers (i.e people who are going to live in the home they buy).

That sounds pretty straightforward, right? Well, yes, but there are a few factors you’ll want to take into account, because while a low deposit home loan might be the more convenient option, it may also prove to be more costly. 

1. Lenders Mortgage Insurance

Before you take out a low deposit home loan you’ll need to brace yourself for the cost of Lenders Mortgage Insurance (LMI), because most banks and lenders require LMI to be taken out if a borrower’s deposit is below 20%.

LMI is not an insignificant sum of money either. It can cost thousands or even tens of thousands of dollars, plus it's scaled, so the more you borrow the higher your insurance cost will be. And when it comes to paying for it, you’ll generally have two options: settling it upfront, or having the cost capitalised into the loan (although with this option you’ll end up paying interest on it).

Do you have to take out Lenders Mortgage Insurance though? Yes, if you can’t come up with a 20% deposit and your lender requires it. That’s because rather than providing protection for you (the home buyer and borrower) in the event that you get behind on your repayments, LMI is actually designed to cover the lender if you default on the loan. If you’re looking to safeguard yourself though, Mortgage Protection Insurance might be the option you're after.

2. Interest rates

Another factor to consider is that lenders tend to charge a rate premium on loans with higher loan-to-value ratios (LVRs). Very quickly, the loan-to-value ratio is used by lenders to assess how risky you are as a borrower - so a higher LVR would indicate that a borrower has a lower deposit or existing equity in the property e.g. if you were purchasing with a 10% deposit you'd be borrowing 90% of the property’s value so your LVR would be 90%.

While there's no set formula all lenders follow in terms of the interest rates they charge in relation to LVR, the most competitive rates on offer tend to be for borrowers with an LVR below 80%, or even 60% in some cases. And given that a difference of a few basis points could have a sizeable impact on the amount of interest you pay over the life of the loan, it's certainly a factor worth thinking about.

Aside from taking up any support on offer from parents or family members, another option for Australian home buyers is to make the most of government initiatives such as the First Home Loan Deposit Scheme or the Family Home Guarantee.

Launched by the federal government in 2019, the First Home Loan Deposit Scheme basically helps eligible first home buyers purchase property without having to fork out for lenders mortgage insurance. It works like this: buyers will need to save a deposit of at least 5%, then the government will guarantee the remaining deposit requirement to the bank (i.e. the remaining 15%).

Alternatively, the Family Home Guarantee - which was rolled out as part of the 2021 Federal Budget - gives single parents the chance to purchase their own homes without needing to pay LMI. Under the initiative eligible buyers can buy a property with a deposit as low as 2%, with the government guaranteeing the difference to a 20% deposit.

Now those are just initiatives targeting borrowers with lower deposits. For more government-run schemes you may be interested in checking out our guides on the First Home Super Saver Scheme and First Home Owner Grant.

We’ve already talked about lenders' mortgage insurance and interest rates as costs that low deposit borrowers need to be aware of, but there are also some more general costs worth considering - no matter the type of borrower you are.

• Stamp duty: Charged by your state or territory, the stamp duty costs can be significant and, unlike lenders mortgage insurance, it must be paid upfront. For example, our stamp duty calculator shows that if you’re a first home buyer purchasing an existing property in Queensland to live in worth $550,000, you will be charged $10,600 in stamp duty.

• Upfront mortgage fees: Many home loan providers charge upfront fees for processing and organising your mortgage application. These can include application fees, legal fees, settlement fees and valuation fees which can range anywhere between a few hundred dollars to well over $1,000 all up.

• Ongoing fees: On top of paying interest, you may also have to pay a monthly or annual service fee which lenders charge for any administration costs associated with your home loan. Ongoing services fees are particularly common with packaged loans, so you may want to weigh up the benefits involved against the cost of the fee.

1. Check your borrowing power

With interest rates among the lowest they’ve ever been and mortgage sizes at all time highs, you’ll want to make sure that you can comfortably service the loan - even if interest rates do rise. Punch your numbers into our borrowing calculator to see how you fare.

2. Prove your savings credentials

Using a guarantor may mean that you can take out a home loan with zero deposit, but you'll still need to show that you can service the loan on your own. Lenders will want to see proof of genuine savings by looking at around three months worth of bank account statements, so one way to ensure you’re always putting away money is by setting up a recurring transfer to your savings account on payday.

3. Clear any debt

As part of the application process, home loan lenders will look over any existing debt you have - whether that's on a credit card, or via a personal loan or car loan. Given that outstanding debt could impact your ability to get a loan, it may be a wise idea to tackle this before applying for a home loan.

4. Reduce your credit card limit

Even if you don't have an outstanding balance, any credit you can draw down on will be taken into consideration when a lender is assessing you for a home loan. So the lower your credit card limit is, the better.

5. Keep your life consistent

Changing jobs or purchasing an expensive item before applying for a home loan could be a red flag to a lender, so in the months prior to applying for a loan it can be a good idea to keep things consistent by staying with your current job and avoiding any big purchases.

RELATED: 5 money tests to pass before getting your first mortgage

Navigating the property or home loan maze for the first time? We get it, it can be confusing, so if you're after more information then a great place to start is at our dedicated first time buyers hub where we run through all the major must-knows with a range of guides and tips.

Or if you’re at the stage of comparing home loan deals, our first home loan comparison table is a great place to compare rates, fees and features all in one place.