What are the Pros and Cons of a No Deposit Home Loan?
A no deposit home loan, also known as a 100 percent loan, enables one to get into a new home without paying any money down. The upside is that the homeowner saves money upfront; the downside is that the home ultimately isn't any cheaper. The amount that wasn't billed as a down payment is added into the loan, which means it must be paid back with interest. No deposit home loans also carry steeper interest rates and repayment amounts. No deposit loans can be a practical option if the homeowner is able to absorb the extra costs; if the homeowner doesn't factor in the extra costs, however, such loans can be disastrous.
For certain homeowners, opting for a no deposit home loan could be a wise move. Some people, for example, may have money to cover the cost of the house, but can't provide a down payment because funds are tied up in other investments. In such cases, no deposit home loans might allow individuals to purchase a house in a way that better suits their investment situation.
For an individual who hasn't saved enough money for a down payment, but can be sure that their income will remain steady over the years, a no deposit home loan could be a relatively safe way of getting into a nice home. This is a risky avenue, however, as it assumes that the homeowner will not suffer a job loss or other financial setback. Without any safety net, it can be easy to fall behind on payments if a financial situation goes wrong.
For the majority of buyers, the cons to a no deposit home loan probably outweigh the pros. Anyone who opts for a no deposit home loan purely because it sounds like a bargain may be tragically wrong. Such buyers often quickly find out that 100 percent loans don't actually decrease the amount they'll have to pay on the house; the money simply gets bundled up in a different way. No deposit home loans also cost the homeowner more money through higher interest rates and repayment amounts.
Down payments are actually the more fiscally sound way to buy a house if one can afford it, as it offers the buyer a chance to pay down a sizable chunk of the home interest-free. With no deposit home loans, what amount would have been paid up front gets covered by the lender, who then charges interest. Over time, interest adds thousands of dollars onto the repayment amount. If a buyer can afford it, paying money up front to avoid higher interest payments will always be cheaper than a no deposit home loan.
Mortgage options, including no deposit home loans, were a major cause of the U.S. economic crisis in 2007-2008, having helped make it possible for people to get into homes that they ultimately couldn't afford. As such, it's important to remember past mistakes of home ownership before signing on a 100 percent loan. Such loans can be beneficial in unique circumstances, but they carry more risk than a conventional mortgage loan.
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