No Deposit Home Loan
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A no deposit home loan enables one to borrow loan amount equivalent to 100% of the purchase price of the home or real estate property. This loan is an ideal source of financing for first home buyers, who may not have the necessary funds or equity to meet the down payment requirements of standard home loan. It is also an ideal option for individuals with other financial commitments; as making a customary 10-20% down payment could prove highly taxing on their pockets.[br]
No Deposit Home Loan: Important Considerations
No deposit home loans carry higher interest rates, and must be considered only when the market is rising. In a declining market, it is advisable to negotiate for a lower interest rate. This is because when the real estate market drops, borrowers build up negative equity as their homes lose their resale value.
Another reason for reconsidering the decision to take a no deposit home loan is the additional costs associated with it, including:
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Mortgage insurance: Typically, when a home loan amount exceeds 80% of the property’s value, a borrower has to pay 2-3 percent of the loan value as mortgage insurance. Lenders charge mortgage insurance to lower their lending risk. A borrower can, however, avoid this fee by introducing a guarantor on the home loan contract. This enables the borrower to remain within the lender’s 80% threshold.
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Deferred establishment fee: This fee is levied on a home loan borrower when he attempts to close the home loan account before the stipulated term. This fee must be taken into consideration by borrowers hoping to switch to a standard mortgage in a few years for obtaining a lower interest rate.[br]
Finally, a prospective no deposit home loan borrower must take into consideration the strict lending criteria on such loans. Most no deposit home loans accompany relatively higher debt-servicing ratio, which implies the level of a borrower’s debt to his income. Consequently, an individual with a poor credit may not qualify for such loans. Such loans can only be utilized for certain types of properties, at certain locations.
