How to buy a property with no cash deposits

Saving a six-figure deposit is out of reach for most people but there is a way to buy without putting down any cash – there is a catch though.

With the average time to save for a 20 per cent deposit in somewhere as expensive as Sydney taking 17 years, many people are looking for ways to get on the property ladder sooner. One way is through what’s called a “family guarantee”.

A family guarantee is something that can help you buy a property without you needing to put a single dollar down as a deposit.

The terminology can get a little confusing here, as it’s sometimes referred to by a bunch of different names; family pledge, equity guarantee, “going guarantor” or more colloquially Bank of Mum and Dad. These are all terms that are used interchangeably and mean the same thing.

Essentially the core element is that another property owner is providing a guarantee for your borrowing.

Now, it should be acknowledged that not everyone can do this – it does involve someone in your family having a property that they can use to guarantee on your behalf.

Going guarantor means you don’t need a single dollar for a home loan deposit. Picture: iStock

When you buy a property, you generally need to put down a deposit for the bank to lend you the money to complete the purchase. With a family guarantee loan, your deposit is covered by a separate loan, which is secured (or “guaranteed”) against the value of another property.

Data from Aussie Home Loans showed that this way of buying property is on the rise – guarantor loans have increased by 71 per cent over six years.

What are the benefits of using a family guarantee?

The big benefit of using a family guarantee to buy a property is that you don’t need a cash deposit, meaning you can effectively get into the market without putting in any of your savings.

It’s worth noting you still need to go through the same “serviceability” assessments with the bank, meaning you need to show the bank you can afford your potential mortgage payments.

But, with sky-high property prices around Australia saving up a deposit can take some serious work – using a family guarantee can be a way to shortcut your way into the property market.

Skyrocketing house prices means saving for a deposit is out of reach for many people. Picture: NCA NewsWire / David Swift

What are the risks that come with using a family guarantee loan?

With higher borrowing levels on your property purchase, you do face some extra risks. The big one is that your mortgage payments will be higher because of your higher borrowing levels, meaning more of your income will be needed to make your mortgage payments.

Because your borrowing levels are higher, it also means you will be more impacted by changes to interest rates. And with the current ultra low interest rates and many predicting interest rate rises in the shorter term, this risk isn’t a small one.

Another risk you face is the impact of being unable to earn an income. All mortgage borrowers face this risk, but when your debt levels are higher the risk is increased. When you borrow, think about protecting yourself with some good income replacement insurance, as well as having a solid emergency fund in place so you don’t get caught short.

That being said, if you’re smart with how you plan out your property purchase and risk management strategy these risks can be significantly reduced. Take the time to make sure you can comfortably afford your mortgage payments both now and as things change over time.

Who can access a family guarantee?

There are two main conditions you’ll need to meet to access a family guarantee loan. The first is that you need to have someone that’s prepared to actually guarantee your loan.

Note this doesn’t necessarily need to be a family member, it’s just that family are normally the only people that will be prepared to put their property on the line as security for you.

Using a guarantor loan means you can be in your new home sooner. Picture: iStock

The second condition is that the person who is prepared to guarantee your mortgage needs to own a property that has enough equity to cover your property deposit. The ‘equity value’ of a property can seem a little confusing, but it’s simply the value of the property less the value of any debt secured against it. So if a property is worth $750,000 with a mortgage of $250,000, the total equity value is $500,000 ($750k-$250k).

Note that banks generally will lend up to around 80 per cent of the equity value of a property, so long as the bank is comfortable you’ll be able to afford the mortgage repayments.

Is a family guarantee loan right for you?

The key to figuring out if this sort of loan setup is right for you comes down to your planning. When buying a property, there are some key things you should be looking to do to ensure your property purchase is a smart one. This approach isn’t significantly different if you use a family guarantee or not, but the importance of doing this is highlighted when your borrowing levels are higher.

Before using a family guarantee loan you need to check it’s right for you. Picture: Bench Accounting, Unsplash

When buying a property, you should make sure your purchase fits with your financial position today, and that it will also fit as things change moving forward. Things like interest rate rises, changes to your income, and planned expenses like starting a family or business are all things that will have an impact on how your property fits with the other things going on in your financial world.

Take the time to think ahead, laying out any changes you think might happen and you’ll go a long way to getting the results you’re looking for from your property purchase.

The wrap

Using a family guarantee can be an effective shortcut to get you onto the property ladder faster and easier. You can avoid the hard slog of building a six-figure deposit, hold onto all of your savings post your property purchase, and potentially even borrow more to access a property you otherwise might not be able to afford. But this approach does come with risks that should be carefully managed.

Beware of higher mortgage repayments, the risk of increasing interest rates, and understand how higher borrowing levels can impact your evolving financial situation – all things that can impact how your property purchase actually works with the life you want to live.

If you think a family guarantee might work for you, do your research and get some good help to plan out your purchase. And of course, make sure you get mum a good card on Mother’s Day …

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth, and Author of the Amazon Best Selling Book ‘Get Unstuck: Your guide to creating a life not limited by money’.

Ben is putting on a series of free money education events in 2022 to help you get on the front financial foot. You can check out all the details and book your place here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.