No Deposit Home Loans

Most of us dream of living in our own home. But when you’re just starting out, your level of income may not exactly allow you to save enough for a deposit to buy a home. This is a common problem among first time home buyers. On top of that, it is also difficult to save enough money to cover the fees.

When you take out a mortgage to buy a house, your mortgage lender will probably require at least 5% deposit. Normally, you also need another 5% to pay for the costs of the mortgage. That may be a huge hurdle for you, but it does not necessarily exclude you from the property market. Mortgage lenders have developed a finance product that helps people in your situation — the no deposit home loan.

The big advantage of a no deposit home loan is the chance to start owning a home without having to save money for the deposit. In effect, the mortgage lender is willing to let you borrow 100% of the purchase price and you only have to come up with money for the costs, such as mortgage insurance, stamp duty, property valuation, and other establishment costs.

In some cases, the mortgage lender may even lend as much as 105% so that there is enough extra money to cover the costs. You don’t even have to worry about saving for the costs of the no deposit home loan.

The prudent first time home buyer should consider no deposit home loans very carefully, though. You have to assure yourself that the mortgage lender is giving you a good deal.

No deposit home loans mean more stringent standards in the mortgage lender’s approval criteria, particularly in regard to your credit history. Since the mortgage lender faces more risk with this type of loan, the interest rate will be higher than the standard home mortgage. The difference can be about 0.7%, more or less, compared to the rate for buyers who saved a deposit. That means your monthly repayments will be higher.

When property values are on the uptrend, a no deposit home loan gives you an edge; but in tight market conditions, you could face the risk of negative equity, where you owe more on your mortgage than the market value of the mortgaged property.

In addition to higher interest and property market risks, another down side is that there are added costs associated with no deposit home loans. The most important added cost is mortgage insurance. Generally, when the size of the loan exceeds 80% of the value of the property, mortgage lenders try to reduce their lending risk by requiring you to purchase mortgage insurance. This may cost 2-3% of the loan amount.

To avoid the charge, you can try persuading someone to act as a guarantor, that is, to guarantee 20% of the loan and thus enable you to fall within the 80% mortgage lender’s threshold.

The other important cost could be deferred establishment fees. These arrangements allow you to defer payment of mortgage establishment fees when you first take out the mortgage; however, if you close out your loan earlier than the stipulated term, you will have to pay these hefty fees. This could happen when you want to switch to a standard mortgage after a few years, hoping to get a lower interest rate.

Weigh up these issues when considering a no deposit home loan. Make sure you can afford it and that you are covered in case there is an interest rate rise.

Disclaimer:

No investment advice provided to you.
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