Several financial institutions offer a home loan for the full purchase price, or close to it. However, this comes at a cost:
- Mortgage insurance usually applies if you have less than a 20% deposit.
- No-deposit loans can also have a higher interest rate, especially compared to basic loans.
Mortgage insurance doesn’t insure you, but the lender. It protects the lender if you default on the loan and your home is sold for less than your loan amount. The insurance will compensate the lender, but you’re still not absolved from the debt — the insurer can chase you for it. It’s worth taking the cost of mortgage insurance into account when shopping for a home loan, as it varies between lenders. See the variations we found, below.
Mortgage insurance cost comparison
A small deposit versus no deposit can make a big difference. For example, on a $400,000 home loan, a deposit of just $20,000 (5%) could make your mortgage insurance around $4000 cheaper.
Some lenders will even lend you more than your home is worth. For example, First Permanent offers a 106% mortgage. That means you don’t even need to save for legal fees and other costs. But does this make financial sense?
If you buy a home worth $236,000, you can borrow $250,000 on a 106% loan. At an interest rate of 8% on a 30-year mortgage, making minimum monthly repayments, it will take:
- Over five and a half years before you owe 100% of the original value of your home.
- 15.5 years before your loan is down to 80% of that value.
This calculation doesn’t take into account changes to house prices. If your home gains in value you’ll reach these percentages much sooner, but if it loses in value you’ll be deep in the red for a very long time unless you can make extra repayments.
A special type of no-deposit mortgage is the Graduate Home Loan. Offered by First Permanent, it enables you to pay back your HECS-HELP debt when you take out a home loan.
There’s no maximum amount you can borrow above the value of the property, with an average loan of 110%, according to First Permanent.
However, a 3.2% upfront fee on the full loan amount applies — for example, about $8000 on a $250,000 loan. You also have to pay a higher interest rate. And if you want to refinance within the first seven years you’ll have to pay another two fees, which come to 3% combined. All those fees, though, are just the beginning.
The main problem is that you’re paying a much higher interest charge on your HELP debt. For example:
- With normal HELP repayments, if you have an income of $80,000 with a $20,000 HELP debt, you’re required to use 8% of your gross income to repay your HELP debt. Your debt is indexed (goes up) at a rate equal to the CPI — 3.4% in 2007. You’d need about three years to repay the debt and would pay about $1500 extra because of indexation.
- If you repay the HELP debt as part of your mortgage, you initially get a 10% discount, so it reduces to $18,000. However, repaying this amount over 30 years at the current 8.9% interest rate would mean you’d pay about $33,600 in interest.
CHOICE verdict on no-deposit home loans
While these loans enable you to buy a house sooner, you need to take the cost of mortgage insurance into account. And with a loan for more than the value of the property, it’s crucial to make extra repayments to get some equity as quickly as you can.
Saving as much as you can before buying will lower the amount of mortgage insurance, or remove it altogether if you can save a deposit of 20% or more of the property’s value. It’ll also give you a wider variety of lenders and loans to choose from — and helps you get used to the discipline needed when you have a mortgage.