4 ways to buy a property with no cash deposit

If your property dream seems to be floating further and further out of reach, you’re not alone.

Loan Value Ratios (LVRs) are tighter. Investment home loan rates have risen. And more and more Australians are struggling to find the cash deposit they need to secure the home they want.

The good news is there are still ways for Australians to start building their investment property portfolio. Even without a cash deposit.

Key takeaways

Use existing equity

If you have equity in an existing home or other investment properties, you can borrow against this equity.

Use the equity to complement your loan against your new investment property. To minimise your interest costs, arrange for same day settlement or drawdown of both loans.

Once you have formal approval, you have the option of securing your purchase with a deposit bond from a trusted provider, instead of paying a cash deposit upfront..

Remember that borrowing anything over 80% will most likely incur Lenders Mortgage Insurance (LMI), so be sure to obtain financial advice that suits your own circumstances.

Pros

• You’ll have full autonomy and control over your purchase
• Popular and effective way to use your existing assets to grow your wealth

Cons

• You can’t use existing equity forever. One day, it will run out!
• Equity is based on the property value and can therefore be impacted by market conditions.

Get a guarantor loan

Not in the position to utilise equity in your own home or investment property? Consider a guarantor. If you have a family member with sufficient equity in their own home or investment property, talk to them about providing a “limited guarantee” (also known as a family guarantee). This is usually equivalent to 20% of the purchase price of your new property, plus any other costs that you need to borrow (like stamp duty).

One advantage is you won’t need to pay Lenders Mortgage Insurance. And more importantly, it gets you a foothold into the property market. However, there are some important things to consider before you embark on a family guarantee.

First, a family guarantee is in place for the life of the loan. You can mitigate this by:

• making additional payments on your loan to reduce the debt.
• devising a strategy to create equity in your new property, which will allow you to refinance within a few years and remove the guarantee. Start by choosing a good location with solid property growth. Then think about renovating or improving your home to increase the value.

A family guarantee also impacts the family member, so we recommend any person considering this to get financial and legal advice.

Pros

• You’re using other people’s equity
• You avoid LMI, potentially saving you thousands

Cons

• You’re reliant on family members to support your purchase, which can impact their own future plans
• Can leave your family exposed should you default on your loan

Partnerships or joint ventures

Why not buy with a partner, friend or someone with the same goals as you? You can buy a property as a tenant in common, which means each partner owns a share of the property as a percentage.

There are a few things to remember. Even though each person owns a portion of the property, any lending on the property is owed by all parties jointly. So, if one person stops paying their share, all owners are still responsible for the entire debt.

It goes without saying that you should trust the person you’re going into business with. Even the strongest friendships should have a written partnership agreement that covers:

• Who is responsible for making day-to-day decisions on the property, and up to what amount that person has authority to spend on repairs or incidentals without approval from the other owners
• How to deal with disputes
• What happens if one partner wants to sell

Get that right and you could have a successful property partnership.

Pros

• Great way to pool resources, share risks, enabling you all to get on the property ladder
• Creates opportunities that you might not have been able to access alone

Cons

• You take the risk that one personal argument can impact your business relationship
• You are ultimately responsible for the entire debt

Buy off the plan

For the well-researched investor, there could be a lot to gain by buying an off-the-plan or house and land package investment property. Buying a property off the plan could not only save on stamp duty costs due to government incentives, but also locks in the price today.

Picking a property in a strong location and growth area means the value may go up by the time of settlement, which can be up to two to five years down the track.

Many lenders will lend on the valuation rather than the purchase price, which means you can minimise your contribution. Speak to your broker about the options available to you.

Pros

• Save on stamp duty
• Lock in the price today and you may not need to settle for up to two or five years

Cons

• Risk that valuation at completion doesn’t match the price paid
• Any cash deposit you’ve paid is locked away until settlement, depriving you of the opportunity to use it for something else

Summary

At the end of the day, only you can decide the right way forward for your circumstances and goals.

But that decision will be easier if you seek professional advice and take steps to understand all the options available to you. Chances are, there’s a solution out there that’s got just what you need.