Personal Loan as Home Loan Deposit

Saving for a home loan deposit is a big ask for many Australians. Genuine savings can take years to build up – in one review saving up for an average house in Sydney could take 8.2 years! Some prospective homebuyers may opt for other modes of putting up a deposit. One strategy is to use…

Saving for a home loan deposit is a big ask for many Australians. Genuine savings can take years to build up – in one review saving up for an average house in Sydney could take 8.2 years! Some prospective homebuyers may opt for other modes of putting up a deposit.

One strategy is to use a personal loan to cover a portion of the home loan deposit. While not all homebuyers are eligible for this option, it is worth exploring if you can buy a property now.

Before you apply for a personal loan, let’s explore the viability of using it as a mortgage deposit and what your considerations should be before potentially taking on additional debt on top of the home loan.

Can I use a personal loan for a home loan deposit?

Most lenders do not offer home loans if you have a borrowed deposit – many banks require that clients have genuine savings to show the capability of repaying the mortgage. It’s inherently riskier to approve a borrower who loans the deposit for the mortgage.

That said, some specialist lenders do offer personal loans to add to your home loan deposit.

The caveat is you need to meet the eligibility requirements for BOTH a home loan and a personal loan. After all, you are taking on two types of loans. You will then be assessed on how you manage financial commitments.

If you plan on using a personal loan for a home deposit, consider these qualifications:

  • High income to afford both repayments;
  • Good credit rating;
  • Some genuine savings to make up for any shortfall;
  • Good rental history.

Aside from a clean credit history, you need a stable, high income to get a personal loan for a house deposit. Your monthly income should be enough to comfortably repay two loans – the personal loan and the mortgage.

How much personal loan can I borrow?

If you are considering using a personal loan as a home loan deposit, think of it as supplement to the minimum 5% home deposit that banks usually require.

For instance, if you plan to buy your first property worth $600,000. You already have a deposit that’s 10% of the value, which is $60,000. Even so, the loan amount is still at $540,000, plus you have to pay Lenders Mortgage Insurance – estimated at $11,000.

You could take out a personal loan to borrow a further $60,000 to make up the 20% deposit needed to waive the LMI.

Here’s the costs break down with the personal loan:

  • Home loan amount = $480,000
  • Unsecured personal loan = $60,000 with 7.50% rate over 6 years
  • Mortgage monthly repayments at 2.00% in 30 years = $1,774/month
  • Personal loan monthly repayments = $1,037
  • Total monthly repayments on 2 loans = $2,811
  • Total interest charges on 2 loans (6 years and 30 years) = $173,395

The numbers show that borrowing a personal loan to avoid LMI could help you pay less overall on interest rates.

However, the monthly repayments also show that this is only for those with higher PAYG or monthly income source. Most Australian borrowers may not be able to repay that much every month.

Is it a good idea to use personal loan as home loan deposit?

Taking on a personal loan isn’t for everybody. You should weigh first the repayment burden of having two loans versus the cost of a lower deposit and LMI.

If you are confident that you can pay off the personal loan quickly, then it may be viable. Otherwise, you could accumulate more interest and it could be too much to bear monthly.

Remember, taking on a personal loan increases your debt burden and financial risk. Unforeseen circumstances such as job loss or interest rate rises can place additional strain on your finances. Consider the potential impact on your overall financial security.

We recommend exploring other options to save for a home loan deposit. For instance, if you have the option to get a guarantor home loan, this could help you reach the 20% deposit percentage without paying LMI.

There are also no-deposit home loan options with a higher interest rate but would make it possible to secure a mortgage without taking out two loans.

Let our mortgage broker and financial experts help you crunch the numbers so you can find the best home loan products and save on fees.

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Darin Hindmarsh
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