A few years ago, many of us would have had a light chuckle to ourselves if someone mentioned that you could borrow money to buy a house with only the promise of solid future earnings. But today this is a regular occurrence. Many of the industry’s non-conforming lenders are selling these financial products to many happy consumers, with most of the major banks avoiding this riskier route.
Ideally, the individuals set to gain from this product have high incomes in industries with high job security. With this loan you are presuming that the benefits of immediate ownership and debt outweigh the costs of renting. This may not always be the case however. The risk to the lender is greater and so you will pay a premium interest rate for the privilege, usually about 2% higher than the current market rate.
With this is mind, it may be time to clean the dust of the old mortgage calculator and assess the long term financial gain or speak to a financial consultant to establish whether this is a sound option for you, and for many people it can be.
Of course, there is no such thing as a free lunch and strictly speaking, no deposit means “with enough money to cover initial expenses” such as stamp duty, loan fees and mortgage insurance. If you are lucky enough to be eligible for a government first home buyers’ grant, you may have most of these expenses paid for you.
The main point with this type of loan is that to really win you are betting that your salary will be increasing steadily over the term of the loan. This income will then be able to be ploughed back into the loan to build some equity.
In many countries, such as Australia, no deposit home loans are becoming less attractive due to the state of the market. Lenders are becoming more stringent with their loan acceptance policies, indicating a potential interest rate rise and thus much greater risk to those with no deposit home loans. The lender may also have harsh exit fees, running into thousands of dollars so read carefully before you sign on the dotted line.
Many lenders also will only lend for specific types of property, leaving well alone riskier properties in regional areas and places with no established resale value.
Here are a few tips to help you manage your financial position.
- Allow for higher interest rates when budgeting for repayments over the next 2-3 years,
- Ensure personal debts like credit cards and car loans are under control before committing to a property loan, and
- Make extra repayments where possible to reduce your exposure to higher rates and falling prices.
Brad Slade
More information available at http://members.ozemail.com.au/~lnart/
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