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Indeed, the Sydney property market offers quite an appealing opportunity for most as it tends to yield relatively good returns. Nonetheless, getting an entry deposit may be the major challenge facing an investor when venturing into this market.
In this post, we’ll dive into the reality of no deposit home loans Sydney for investors and explore how they work, their risks, and alternatives available for those looking to build their property portfolio without a significant upfront deposit.
Understanding No Deposit Home Loans
No-deposit home loans are loans that the borrower does not need to pay in the form of a traditional deposit, usually 5% to 20% of the property’s purchase price. Such loans are generally targeted at first-time home buyers who may have difficulties saving for deposits but want to enter the property market sooner.
For investors, no deposit home loans are less likely to be achieved. In most cases, lenders consider investment properties to have higher risks compared to owner-occupied properties, and a no deposit loan puts even more risk on the lender’s side.
Why No Deposit Home Loans for Investors are Rare?
Usually, lenders are a lot more careful with investment properties because they purchase the property with the prospect of rental income or capital gain in the minds, but not to live in. Further, a no deposit loan would require the investor to borrow the full purchase price without any equity in security but investors who already own one property may already have some equity in place.
As a result, no deposit home loans for investors are rarely offered from mainstream banks or lenders. Instead, some specialist lenders, brokers, or non-bank lenders may offer these products with specific terms and conditions.
How do investors get a no deposit loan?
In most cases, to secure a no deposit home loan, investors are expected to be much more qualified than the average home buyer. These factors include:
- Guarantor Loans: One of the most common ways investors can obtain a no deposit loan is through a guarantor, usually a family member, who is willing to use their property as collateral. A guarantor can reduce the risk of the lender since they provide extra security for the loan.
- Equity from Other Assets: If the investor already has one or more properties, he can use the equity in those assets as a deposit for the new investment property. It thus means that he does not have to produce cash upfront but can still secure the loan based on the value of his existing asset base.
- Specialist Lenders: Some non-bank lenders or specialist mortgage brokers may be available to provide no deposit loans on investment properties; however, it is usually going to be costly and with greater conditions. Seeking the advice of a financial planner is advisable because these options present risks.
Risk of No Deposit Loans for Investors
No deposit loans can be appealing for investors who want to acquire property without much upfront investment. However, such loans are accompanied by risks that should not be ignored.
- Higher Interest Rates: The higher interest rates in no deposit loans compensate for the added risk involved. In the long term, this significantly increases the total amount paid over the life of the loan.
- Negative Equity: If Sydney property values continue to fall or don’t appreciate at the predicted rate, there is a high possibility that negative equity will become an issue because investors will end up owing more on the property than it’s worth.
- Cash Flow Pressure: With no deposit and also higher interest rates, investors can be under higher cash flow pressure, especially in the event of rental income that doesn’t keep pace with expectation.
Is It Worth It?
It is not impossible to secure a no deposit home loan for an investment property in Sydney, though it is very challenging. If you are an investor looking to enter the market without a deposit, guarantor loans, using equity from other properties, or working with specialist lenders might be viable solutions.
Before moving forward, it’s advisable to speak with a mortgage broker or financial advisor to fully understand your options, the potential costs, and the long-term implications of taking out a no deposit loan.