The no deposit home loan! Inconceivable or is it?

Actually this happens more often than you think. To explore this option, you need to understand how it works, the risks and the benefits.

Buying a home is a big deal, full stop. It represents the single largest financial transaction for over 97% of Australians.

To get started on the path to home ownership, a person or a couple are required to provide a deposit which represents their initial contribution to the purchase. 20% is the preferred amount, which convinces the lender you have " skin in the game" and are sharing the risk in the venture. It is pretty hard sometimes to get a full 20% in a short period of time. On average in Australia, it will take 4.6 years to accumulate the 20% deposit to put down on a home.

There are options that can sidestep this, you can use a lesser deposit( as low as 5%) which triggers fail safes with lenders that build in additional costs to the deal. You may have to pay a risk fee, ( a percentage of the total loan), Lenders Mortgage Insurance which protects the lender not you, ( this can run over $10,000 easy) or higher than desirable interest rate ( even worse). You also wind up being assessed at much higher loan servicing rate ( even more worse) than a regular borrower.

It is possible to absorb these extra costs into the loan if you have plenty of borrowing capacity. However, this isn't always viable if your income isn't high enough to offset the extra costs of borrowing and the meet the purchase amount of the property. Nothing is a worse feeling than falling a few dollars short of the dream home. It is even worse, when you have no deposit and you getting the desire to own a home and something beautiful pops up on your radar.

A logical solution that educated families use, is having the parents who are also home owners to provide the security of the 20% deposit by using their home as a secured asset to allow their children to borrow the full amount of the purchase price ( based on income). The lender registers an interest on the parent's property and the children get their home. Educated parents actively help their kids to gain an advantage in today's property market. Discussion with a mortgage broker can provide more options than a conversation with one bank.

It is recommended that the parents obtain independent legal advice. There must be consideration to the potential risk if the kids split up while holding a mortgage. So a formal agreement to be put in place to manage that outcome fairly without impacting the parents is highly recommended. In all cases of obtaining a mortgage, life insurance, income protection insurance are sensible choices to protect the income to make payments on the mortgage, protect the parents interests and provide care for the injured or surviving partner.

When that is all correctly put in place, a suitable home is purchased you can get on with enjoying life.

Over time, the kids can pay down the mortgage enough to have the parent's property released from security. They can also have the property revalued in a growing market and find their property has increased in value enough to also apply for the release of the parent's property. This is a real win/win for all. The bank of Mum and Dad is the 5th largest bank in Australia.

It would be a good idea to pass post along to family and friends who may want to explore this option.