Context: A market searching for growth meets a deposit barrier

Australia’s mortgage engine has slowed. PwC’s Banking Matters analysis flagged subdued growth in mortgage lending of around 2.3% recently, underscoring competition for high-quality volume. At the same time, constrained housing supply—highlighted by policy reviews such as the NSW Productivity review’s call-out that feasibility challenges are holding back new supply—keeps prices firm and deposits out of reach for many buyers. Government programs such as the First Home Guarantee are designed to ease deposit hurdles, but not all borrowers qualify, and places are capped.

Enter a lender with a deposit-free home loan. The idea isn’t new; the risk debate isn’t either. The Reserve Bank of Australia (RBA) has examined first home buyer (FHB) risk dynamics (2022), noting the importance of prudent lending in managing systemic risk. Historically, the Australian Prudential Regulation Authority (APRA) has warned that higher-risk mortgage products demand tighter controls (a theme present in APRA’s earlier commentary on riskier mortgage segments). The question is whether today’s lenders can calibrate the economics and guardrails to make no-deposit loans both safe and profitable.

Decision: A strategic bet on underserved demand—and data-driven underwriting

The lender’s move targets a clear pain point: buyers who can service repayments but cannot amass a deposit. Strategically, the play seeks to:

• Capture growth in a slow market by converting deposit-constrained demand into funded loans.
• Improve customer lifetime value (CLV) via early primary-banking relationships and cross-sell, from transaction accounts to insurance.
• Build brand differentiation versus majors constrained by traditional risk appetites.

The counterweights are capital intensity and tail risk. High loan-to-value ratio (LVR) mortgages consume more capital per dollar lent. Risk-adjusted return on capital (RAROC) hinges on granular underwriting, disciplined pricing, and loss mitigation. The decision, therefore, couples a product innovation (no deposit) with an operating model innovation: data-rich risk scoring and post-origination engagement.

Implementation: Guardrails, capital and governance (the technical deep dive)

No-deposit mortgages have multiple design archetypes in Australia and overseas: 100% LVR loans, lender-funded deposits or split loans, and guarantor-backed structures. Each carries different capital, liquidity, and conduct implications. A robust implementation in the Australian context typically requires:

• Underwriting stack: Serviceability tested with buffers aligned to prudential expectations; granular income and expense verification; and risk tiers by postcode, property type, and borrower profile. AI-driven models can sharpen risk segmentation, but ASIC’s 2024 report “Beware the gap” cautions on governance and transparency—models require explainability, bias controls, and robust validation.
• Capital and insurance strategy: For >80% LVR loans, lenders commonly use Lenders Mortgage Insurance (LMI) or hold equivalent economic capital. Pricing needs to reflect higher expected loss and capital costs; otherwise RAROC compresses to sub-target levels.
• Portfolio limits and triggers: Hard limits on high-LVR exposure, dynamic provisioning, and loan-level early warning triggers (e.g., payment variances, property market indices) to prompt interventions.
• Distribution controls: Broker accreditation, mystery shopping, and suitability checks tailored to deposit-free messaging to avoid mis-selling.
• Customer safeguards: Borrower education on negative equity risk, transparent disclosure of LMI/fees, and hardship pathways. APRA’s long-standing prudential emphasis on responsible lending and risk-weight discipline applies sharply here.

Results (with numbers): Early signals via scenario modelling, risk economics and sensitivity

Given the product’s recency, we model indicative outcomes a prudent lender would track in the first 6–12 months:

• Negative equity sensitivity: On an illustrative $600,000 property financed at 100% LVR, a 5% price fall creates ~$30,000 negative equity. At 10%, the borrower is ~$60,000 underwater. This underscores why portfolio-level geographic caps and conservative valuations matter.
• Repayment shock: At a 6.5% interest rate, a 30-year principal-and-interest loan of $600,000 implies monthly repayments around $3,800. A 100 bp rate increase lifts repayments by roughly 10–11% (~$400/month). Serviceability buffers need to anticipate such shocks.
• RAROC and capital: High-LVR loans raise capital intensity. Where pricing doesn’t fully incorporate expected loss and capital charges (including LMI premiums), margin compression can erode RAROC below hurdle rates. Sensitivity tests show that even a 25–50 bp mispricing can flip an otherwise viable cohort into sub-economic territory over the first 24 months.
• Arrears monitoring: The RBA’s 2022 analysis on FHB risk underscores the importance of standards: early arrears in higher-LVR cohorts can be contained where verification is tight and buffers are adequate. Lenders should track 30+ DPD rates by origination month and LVR tier; a 50–100 bp deterioration versus standard 80% LVR cohorts is an early warning to recalibrate.
• Acquisition economics: In a mortgage market growing at ~2.3%, deposit-free propositions can lift conversion rates materially in broker channels. But higher churn risk without strong primary-banking hooks reduces CLV. Measured cross-sell (e.g., transaction accounts, offset, insurance) can lift CLV by 15–25% in typical Australian bank models; without it, payback periods elongate.

Policy context matters. The Intergenerational Report (2023) highlights mortgage indebtedness as a future macro-fiscal concern, reinforcing the case for conservative risk settings. Budget 2025–26 restates the role of the First Home Guarantee; lenders should ensure their product complements, rather than cannibalises or conflicts with, government-backed pathways.

Lessons: How to make a no-deposit product commercially and prudentially sound

1. Price for capital, not just credit risk. Set pricing to reflect expected loss, LMI cost, and higher capital consumption. RAROC must clear hurdle rates at the cohort level.

2. Build an “explainable AI” underwriting layer. If using machine learning for affordability and fraud checks, align to ASIC’s governance expectations; the Australian Taxation Office’s AI governance approach demonstrates the kind of control frameworks large agencies are moving toward in 2024.

3. Limit concentration and phase rollout. Use postcode and property-type caps, mandate independent valuations, and stage origination (e.g., pilot to 2–5% of monthly flows) with hard stop-loss triggers.

4. Pair origination with resilience. Offer optional payment shock buffers (e.g., built-in savings offsets), proactive check-ins at 3, 6 and 12 months, and hardship pathways that activate before DPD metrics deteriorate.

5. Align with policy and broker incentives. Calibrate eligibility to avoid adverse selection and ensure broker commissions don’t bias toward higher-LVR risk without corresponding quality controls.

6. Communicate the downside clearly. Borrowers must understand negative equity mechanics and the total cost (including insurance and fees). Transparent disclosure reduces conduct risk and builds long-term brand equity.

Strategic outlook: Who wins—and on what terms

Early adopters with strong risk analytics, disciplined capital pricing, and post-origination support can secure a defensible niche and valuable customer cohorts. Those that chase volume without capital-aware pricing and governance will wear higher arrears, impaired CLV, and supervisory scrutiny. Expect regulators to watch data quality, serviceability, and model governance closely—ASIC’s “beware the gap” message will loom large as AI infuses underwriting. For boards, the call is simple: green-light deposit-free lending only where economics clear the bar in base and stress cases, and where the operating model is built for 100% LVR realities, not 80% LVR hopes.