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Empower Money is offering 105 per cent home loans – covering the cost of the property and some.
The lender claimed this will accelerate the property journey for borrowers by up to a decade, as it can take borrowers that long to save for a deposit.
“It’s definitely time for change. People are struggling with the housing crisis and inflation. Home ownership shouldn’t just be for high income earners,” said Empower Money’s executive chairman, Peter Khoury.
“People with solid incomes who meet serviceability criteria should be able to buy now, without a deposit, and start building equity.”
Empower Money also claimed that this product could save buyers over $1 million, as during that decade of saving, the property market doesn’t stand still.
Using Sydney as an example, the average house price has jumped from $1 million to $1.69 million in the last 10 years, a rise of nearly 70 per cent, said Empower Money.
“With rising property prices meaning even larger deposits are needed, first homebuyers are trapped in an endless cycle of saving. And it’s not just young people who are stuck in this cycle, but those in their forties and fifties too,” said Khoury.
“A first homebuyer is behind by $1 million before they make their first mortgage repayment, when price rises and longer periods of paying rent are factored in.”
The business model is built upon rising property values. A $1 million property bought in 2015 with a 105 per cent loan could be worth over $3.2 million in 30 years, based on conservative growth.
In contrast, a buyer who waited 10 years to save a deposit would accrue significantly less equity, missing out on a crucial decade of property value growth. This accrued equity can later be leveraged for renovations or further property investment, building wealth for retirement.
A risky proposition
While this product may work for a certain type of borrower, there are plenty of risks involved.
While it may seem to offer a shortcut to home ownership, it can easily become a debt trap. The loan could magnify exposure to every negative market movement and personal financial setback.
The no deposit loan comes with higher interest rates than traditional loans. Plus, the larger loan amount will result in higher monthly repayments.
The moment you settle on the house, you owe the lender over 100 per cent of the property’s value. If the housing market dips even slightly, you owe more on the mortgage than the house is worth.
This could leave borrowers trapped. The property can’t be sold without coming up with the funds to pay the difference to the lender. It may also be hard to refinance to a better loan deal because lenders may not want to take on a loan for more than a property’s value.
According to Flint Group CEO Christian Stevens, as with any loan, it’s not a one-size-fits-all solution. He said the key is understanding the fine print and making sure the long-term strategy lines up with the higher leverage you’re taking on.
Stevens said these types of products aren't new and can work for the right type of borrower. For many though, the risk may outweigh the reward.
"Products like this can carry higher rates or significant fees, and location risk is critical: blue-chip areas might make sense, but step outside that and the downside gets magnified quickly," he said.
Despite this, Stevens said there have been a strong increase in low or no deposit loans in recent years, reflecting a demand for alternative pathways into the market.
Where the product works
This model worked for buyers like Rabish Kumar, 45, and his partner Kiran Tiwari, 42. After moving to Australia from India in 2021, the couple found themselves trapped in the rental cycle in Sydney’s Sutherland Shire.
“I don’t think we could have done this if it wasn’t for the 105 per cent loan. It would have taken us years to save the deposit, but land costs would have risen during that time and we would have been priced out,” said Tiwari.
The typical borrower accessing Empower Money’s ‘PowerUp Elite’ 105 per cent home loan is aged anywhere between 20 and 50 years old.
Empower Money offers strategies to avoid or reduce lenders mortgage insurance (LMI). However, if LMI is the best option, the lender will say so and work to secure competitive terms with a plan to refinance later.
