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Pros And Cons Of No Deposit Home Loans
A common question for Australian home-hunters is whether no deposit home loans are viable options. It can be an attractive proposition for people who want to harness the benefits of owning property without having to save up the 15% deposit that is standard for many home loan deals.
But it’s not always as simple as this. These loans come at a price and you need to consider your move carefully first.
The Pros
Australian families with good cash-flow and a steady income may have no problems making monthly repayments on loans but not have the necessary deposit saved up to take advantage of the home loan deals on the market – because of other investments or expenses.
Other property investors with funds tied up elsewhere may not have the lump sum usually required to meet a deposit.
That’s when a no deposit home loan can help because it offers the opportunity to buy with the absolute minimum outlay.
The Cons
Of course the price you pay with no deposit home loans is extra interest charges and insurance fees.
The less deposit you have the more the value of the loan which means the higher the interest charges.
Also in Australia, a home loan deal where 85% or more of the value of the property is loaned attracts Lenders Mortgage Insurance to protect the lender. This adds to your ongoing costs.
What Exactly ARE The Extra Charges Involved?
You will need to be clear on exactly how much you will be paying and for how long.
Break down all the charges and see what the monthly payments are and then see if the loan remains attractive. You can use financial calculators to help work out how much total interest you will be paying over the term of the loan.
Don’t forget to factor in insurance. You can use the Lenders Mortgage Insurance calculator to help with that.
Keep it accurate – remember that small mistakes with these large loan figures can lead to big problems.
The Balancing Act
As with many issues of personal finance, whether you will opt for a no deposit loan will be a balancing act between the urgency to buy the property and the extra charges that this will incur in the long run.
You can build equity with your property but you will be paying a premium for it; in a market where house prices are rising this may not be too much of a problem but it can be an extra kick in the teeth if house prices fall.
Are You Eligible?
Not everyone will be eligible for a no deposit home loan, because they present a higher risk to lenders. There may well be extra stipulations with these types of loans to cover this risk, as well as higher interest rates?
As always, check the details of the loan with a fine toothcomb!
