Buying your first home can be one of the most exciting and challenging milestones in one’s life.
Unfortunately, in Australia, the deposit requirement and Lenders Mortgage Insurance (LMI) often makes reaching this milestone, feel like an impossible challenge.
However, there are options available that allow you to enter the property market without a hefty deposit and without having to pay LMI fees which can add thousands of dollars to the cost of your home loan.
In this guide, we’ll explain how you can buy property with no deposit or with a low deposit whilst avoiding LMI. We will focus on family guarantees, specialised lending options, and other strategies available to first-time buyers, particularly in Melbourne’s competitive property market.
What is Lenders Mortgage Insurance (LMI)?
LMI is a type of insurance that lenders require when borrowers have a deposit of less than 20% of the property valuation. It protects the lender in case the borrower defaults on the loan.
Depending on the size of the loan, LMI can be a significant cost, often ranging from $5,000 to $20,000 or more. This impost can be a substantial financial burden for first home buyers who are already struggling to raise a deposit.
However, there are ways to avoid LMI when you have less than the 20% required as a deposit. Family guarantees and specialised home loan products are two of the most popular options.
How to Buy Property with No Deposit or with a Low Deposit and Avoid LMI
1. Use a Family Guarantee (Security Guarantee)
What is a Family Guarantee?
A family guarantee is one of the most common ways to purchase property with no deposit (or with a Low Deposit) and avoid LMI. A family guarantee is the term for when a close family member – typically your parents – offers their home equity as security for your loan. This means the bank can secure the loan against both your property and the family member’s property, which reduces the lender’s risk. Many Australian lenders offer family guarantees. These lenders may allow you to borrow 100% or more of the property’s value, and in return, you can avoid paying LMI. Here’s how it works:
How It Can Help You:
You may be able to borrow 100%+ of the property value (or sometimes even up to 105% without needing to provide a deposit of your own. By using the family member’s equity as additional collateral, the lender will typically waive LMI. Cash, in the form of a Term Deposit, can also be used as an alternative to property security.
How Much Equity Does the Guarantor Need?
The family member must have sufficient equity (equity is the amount equal to the market value of the property minus the current mortgage balance) in their own property (usually at least 40% is required) to act as a guarantor. For example, if you want to buy a home worth $500,000, and the lender is willing to approve a loan of 100%+ of the property’s value, the guarantor will need to have at least $200,000 in equity in their own home.
How much does the Guarantors property need to be worth?
In addition to the equity requirements above, the value of the guarantor’s property must be at least double the amount guaranteed.
Responsibilities of the Guarantor and risk assessment criteria:
The Guarantor must understand that should the Borrower be unable to meet the commitments of the loan, or fails to meet those commitments for any reason, the Guarantor may be required to pay the guaranteed amount (or the outstanding mortgage balance – whichever is the lesser).
Guarantor would not necessarily need to sell the property against which the guarantee is secured should they be required to repay guaranteed amount.
The Guarantor has the option to use other resources to pay the guaranteed amount including borrowing the funds required (providing they have the income to service such a loan and meet any other serviceability requirements).
Once the borrower’s loan-to-value ratio (LVR) falls below 80%, the guarantor may be released from the guarantee, but this process is not automatic and must be formally requested by the Guarantor.
2. Apply for a Low Deposit Home Loan
Some lenders offer specialised Low Deposit home loans for eligible borrowers. These loans are typically available to individuals who meet specific criteria, such as:
- First Home Buyers eligible for Government schemes
- Professionals (e.g., doctors, lawyers, nurses, allied health workers, teachers, etc.)
- Those with mortgage guarantors
In these cases, lenders may allow you to borrow 90-100% of the property value, or in some cases, 105%. The key benefit here is that these loans often come with no requirement to pay Lenders Mortgage Insurance (LMI), even with a higher LVR.
Types of No/Low Deposit Loans:
Professional Loans: Some lenders offer professional loans to high-income professionals (e.g., doctors, engineers, or teachers) with no deposit requirement. These loans are typically low-risk for lenders because they target well-qualified, high-earning individuals.
Government Schemes and Grants:
If you’re a first home buyer, there may be government grants and schemes available to you that can reduce or eliminate the need for a deposit, such as the First Home Owner Grant (FHOG) or the First Home Loan Deposit Scheme (FHLDS).
3. Leverage Special Government Schemes
If you are a first home buyer in Australia, several government schemes can assist with purchasing your first property. These schemes often provide financial support or the ability to bypass some of the traditional financial barriers to home ownership.
First Home Loan Deposit Scheme (FHLDS):
This scheme allows eligible first home buyers to purchase a property with as little as 5% deposit without paying LMI. The government guarantees the difference between the 5% deposit and the 20% deposit required by the lender. This means you can borrow up to 95% of the property value without LMI.
First Home Super Saver Scheme (FHSSS):
While not directly related to LMI or no deposit, the FHSSS allows you to save for your first home using your superannuation fund. The scheme allows you to withdraw up to $50,000 of your voluntary super contributions for a home deposit, which can potentially reduce the amount you need to borrow.
State and Territory Grants:
Depending on your State of residence, you may be eligible for local grants or assistance programs that reduce the deposit required to purchase a home or assist with stamp duty costs.
Victorian Homebuyer Fund:
The Victorian Homebuyer Fund is a shared equity scheme in which the Victorian Government makes a financial contribution to the home you’re buying in exchange for a share in the property. If you have a 5% deposit, the Victorian Government will contribute up to 25% of the purchase price for eligible participants.
Participants must repay the Victorian Government’s share in property over time through refinancing, using your accumulated savings, or upon selling the property. Your maximum property purchase price is subject to the suburb in which your new property is located. The maximum purchase price must be $950,000 or less in metropolitan Melbourne and Geelong, and $700,000 or less in other eligible regional locations. Very few lenders are participating.
A contribution from the Homebuyer Fund does not attract interest, however, as the value of your home changes, the value of the Government’s share (or proportional interest) rises. Because you are buying back some, or all, of the Government’s share in your property, repayments of the Homebuyer Fund contribution will reflect any capital gains of your home.
4. Use a Larger Loan from a Specialised Lender
If you already have some savings, but still need assistance, certain lenders may offer no LMI loans even if you have a smaller deposit (e.g., 5-10%) by using other forms of security, such as:
- Parent’s Property (Guarantor Loan) or
- A Term Deposit.
Summary: How to Buy Property Without a Deposit (or with a Low Deposit) and Without LMI
Buying property without a deposit and avoiding Lenders Mortgage Insurance (LMI) is possible through several strategies:
Family Guarantees: Have a close family member offer their home as security to help you secure the loan and avoid LMI.
Low Deposit Home Loans: Some lenders offer specialised products for eligible professionals or those with strong financial standing.
Government Schemes: Programs like the First Home Loan Deposit Scheme help you buy a home with a smaller deposit and no LMI.
Specialised Lenders: Some lenders offer products for different occupational groups, allowing you to borrow more without paying LMI.
Each option has its pros and cons, so it’s crucial to evaluate which is best for your financial situation and long-term goals.
At Oz Lend, we can help you in every step of the way in buying a property without a deposit (or with a low deposit) whilst avoiding the impost of expensive Lenders Mortgage Insurance.
