Ask Paul: Is a no-deposit home loan too good to be true?
Leonie's daughter has found a way to buy a home without saving a deposit. Paul Clitheroe isn't convinced it's the opportunity it seems.
Reader question
Can I have your opinion on this new way to buy property that my daughter was offered: zeroo.com.au.
They claim: "We provide a loan for 100% of the home purchase price, so you can buy today, not in a decade."
I am concerned that this is not for real. - Leonie
Paul's response
Zeroo Home loans are a real thing, but whether they should be is another question, Leonie!
Their business model of providing a 100% home loan, in reality closer to 105% with stamp duty and legals, gives people a chance to get into the property market with no deposit.
The deal is that they help you to find a "high-growth property" using AI. Any research-based property company can steer you to areas with high population growth and features that tend to drive prices higher, such as good transport, schools and so on.
Anyway, let's assume you find your high-growth property and you buy it.
First, you have negative equity from day one and significant repayments on a loan of greater than 100% of the home's value.
The great hope is that the property increases in value over five years or so, and Zeroo then assists you to get a "normal" loan based on the equity. Their calculator shows a simple assumption of 8.5% annual growth in your property's value, which is very optimistic, especially in the current economic climate.
If you bought for $1 million, with 8.5% annual growth, the property would be worth about $1,503,000 in five years.
You refinance and of the $503,000 increase in value, Zeroo says it gets 10% of the home's new value, in this case, $150,000. I had to laugh at the 10%. It is not 10% of any gain, it is 10% of the entire value of the home, and in their example it's actually some 30% of the increase in value.
That is cheeky!
So, what could possibly go wrong? In their perfect world example, nothing, except you lose a big chunk of any gain in value. In the real world, so much could go wrong, my eyes are spinning.
First up you will need to convince me about a reasonably high-income earner having no savings. Maybe divorce? Then I note they will also consolidate "existing debts". Save me, no deposit plus existing debts!
But then we have the really dangerous bit. If you had a good savings habit and say a 10% deposit, plus cash for stamp duty, and the market then falls 10% (which in many areas, it probably has over the past year) at least you have equity to cover your loan. But more importantly, a proven savings habit.
I laughed when I read that the founder of Zeroo is a former professional skydiver. Nothing wrong with skydivers, but in the case of Zeroo, I'd encourage him to carefully check that his parachute is set to go.
With rising interest rates, a falling property market and potentially higher unemployment, he and his shareholders, not to mention their clients, may need it.
This product is not for me, Leonie, and, I think, not for you either.
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