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With house prices on the rise, saving enough for a deposit can be challenging, especially if you want to avoid costs like LMI. If you need to top up your funds, you might be wondering if a personal loan could help. Join us as we look at whether you could use a personal loan for your house deposit as well as the considerations and potential drawbacks.
Can I get a personal loan for my house deposit?
Yes, you can use a personal loan to supplement your savings for a house deposit if your current funds fall short. However, this decision requires careful consideration.
First, let’s take a look at how much you might need for a deposit when buying a home. The average price of a house in Australia stands at $959,300 as of Q1 2024, while the average loan size as of May 2024 is $626.055.
While some home loan lenders in Australia will accept deposits as low as 5%, many potential buyers aim for a deposit of at least 20% of the property’s value. This is because deposits below this threshold are subject to lender’s mortgage insurance (LMI), which protects the lender if the borrower defaults on their loan. For a house priced at the national average of $959,300, a 20% deposit would amount to $191,860.
With tens of thousands of dollars to save up, homebuyers falling short might look to a personal loan as a way to reach the 20% line and sidestep LMI. If you’re able to pay off your personal loan quickly and not accumulate more in interest, this can be a prudent way to save money on your home loan.
However, it’s important to note that this isn’t always the best avenue to take. Personal loans are relatively easy to apply for with fast approval times, but interest is high and mounts up quickly. For example, if you decided to take out a $30,000 personal loan at a rate of 10% and repay it over five years, you’d be paying more than $8,000 in interest in that time. In some cases, you may find that it’s more cost effective for you to take the LMI hit upfront than repaying a second loan with a high interest rate.
Can I use a personal loan to fund my entire house deposit?
No, you won’t be able to find any lenders who’ll accept a deposit made up entirely of a personal loan. You’ll need to contribute a significant portion of savings to qualify. From a mortgage lender’s perspective, the lower the percentage of your deposit is personal loan funds, the better.
Savings demonstrate financial stability and responsibility. If your entire deposit is funded by a personal loan, it suggests you may not have the financial discipline or resources to save, increasing the risk to the lender. Additionally, having a large personal loan increases your overall debt, which can affect your ability to repay a mortgage.
Some lenders will not approve deposits funded even in part by a personal loan. If you don’t have the savings but still want to buy, you could be looking at a lower deposit and LMI. However, if you took out a personal loan six months ago and still have those funds in your account, these may be considered genuine savings and could be used for your house deposit.
How else can I avoid paying LMI for my house deposit aside from personal loans?
The most common way that homebuyers are able to avoid paying LMI with a sub-20% house deposit is through a guarantor home loan. This involves you listing someone such as a parent, sibling or close friend as a form of security for your mortgage in which they agree to take on the responsibility of servicing the loan should you become unable to. This provides greater confidence to your lender that their loan will be repaid, which can not only allow you to avoid paying LMI, but potentially any deposit at all. There are lenders on the market willing to greenlight mortgages of 100% of the home’s value when a guarantor is listed.
It's also important to be aware that entering a guarantor agreement can put strain on a close relationship: your guarantor is trusting you to be able to pay off your loan without their involvement and not doing so places a significant, unwanted financial burden on a loved one.
If you are buying your first home, another option could be the First Home Guarantee scheme, which allows you to apply with a deposit as little as 5% of your home’s value without having to pay LMI.
What are the pros and cons of getting a personal loan for my house deposit?
Using a personal loan can be an attractive option if you're eager to buy a home but are short on savings. However, it’s important to consider the benefits and drawbacks before making a decision.
Pros
- Avoids LMI: the primary benefit of a personal loan here is that it bypasses the need for you to pay LMI, which is an upfront sum that’s likely to cost you thousands.
- Fast and easy application: the time from application submission to funds hitting your account for a personal loan is fast, usually taking no more than a few days.
- Builds your credit rating: getting a personal loan and servicing it promptly and regularly will increase your credit score at a faster rate, or help your home loan approval chances if you take one out prior.
Cons
- High interest rate: personal loan borrowers are forced to contend with the high interest rates that are assigned to personal loans, which can add up if not paid off quickly.
- Two loan repayments at once: getting a personal loan to help with your home loan creates a situation whereby you’re servicing two different loans, potentially on two different schedules
- May be more expensive: depending on the size of the personal loan you need and its interest rate, it may end up being cheaper to simply pay the LMI rather than reach a 20% deposit.
How do I compare personal loans for my house deposit?
There are a number of factors you should compare on personal loans, including:
- Interest rate:Â look out for lower rates that reduce your overall interest outlay.
- Fees: added costs such as establishment, ongoing and late repayment fees can set you back if you’re not careful.
- Loan term:Â if you want a particularly short or long loan term, you should look for lenders that offer between one and seven years.
- Features:Â additional features like extra repayments and redraw facilities add flexibility to your loan experience.
- Credit requirements: understand the credit score requirements for each loan. Higher credit scores often qualify for better rates and terms.
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Written by Fact checked
This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.
The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.
Approval for personal loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.
The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well as others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.
