Published on December 04, 2015

No deposit, no equity investment property

I’m going to share with you a little known strategy that will turn a “no” from your bank manager into a “yes”; I did it back in 2003.

The concept of borrowing 105% and needing no cash deposit for an investment property purchase sometimes confuses people.

It does not mean a bank will loan you 105% against just the security of the new property being purchased; they do need other security.

Most commonly people use the equity in another property as security; typically their own home or an investment property they have held for a while and has increased in value.

Using someone else’s equity

What you may not realise is that if you have income but have not saved for a deposit, and you do not have another property (or you do but there is no available equity in it yet) it is still possible to borrow 105% to buy a property.

You may have graduated from university a year ago and are working in a well paid job but you simply haven’t been working long enough to save for that deposit.

Maybe you do own other properties but you have ‘maxed out’ your ability to borrow against them. You qualify for a loan from an income (or serviceability) calculation but simply lack the equity for the deposit.

Well the good news is that you can use someone else’s equity and turn a “no” into a “yes”; as I did in 2003 when one of my brothers graciously allowed me to ‘ borrow his equity’ for a short time.

This is a great strategy for a parent with equity to help a working child without a deposit to get started in the property market.

Allowing someone to use your equity does not tie you up in their purchase or loan, it simply makes you the guarantor.

A completely separate loan can be set up against the family home, in the name of the child, to draw the balance of funds required at settlement. Doing this means that mum and dad can provide the facility (from their bank ‘A’) to their child to complete settlement of the new purchase with Bank ‘B’.

Warning; great care needs to be taken when choosing a lender to do this; as well as the loan product type used. This is something that MRD can absolutely assist you with.

My Story

In 2003 I was told by my bank that that while I had the income to qualify for an investment property purchase I was looking at, I did not have enough equity.

I knew the market then was as it is now, and had entered the growth phase so I was keen to ride that growth rather than miss out.

I spoke with my brother who was with the same bank and he agreed to allow the equity in his home to be offered as security for our purchase.

The property was $395,000 to buy but we needed $412,000 to settle it. With the additional security my bank manager’s “No” became “how much do you want?”.

I asked for $415,000 and at settlement, having put nothing into the deal, received a $3,000 cheque back as change out of the transaction.

Because we were in a growing market it took less than 18 months for the increased value in our investment property to allow the release of my brother’s home.

Had I done this in a flat market it could have meant his home was tied up as security for ours for a number of years.

Just the growth in that property has allowed us to leverage into two more (so far) so you can see how strategically important it was for me to turn the bank manager’s “No” into a “Yes”.

Next week I will pull apart the topic of cross securitisation of properties and tell you the pros and cons as well as an alternative strategy to speed up your investment strategy.

There may also be other ways of purchasing property you have not considered, like through your superannuation (SMSF).

For any of your property or finance needs; whether you want to learn more or take action, call us on 1300 883 854 or contact us online and spell out exactly how you would like us to support / partner with you at this time.

Nick Lockhart
Partnering with you for your investment success.