Using personal loan as a house deposit. A bad idea?

[Tabitha J]

Hi there, I am hoping to buy a property in Tasmania worth $475,000, but do not have enough deposit saved up. For now, I have only saved $5,000 & I am living rent-free at my mom's house. I have been working for 4 years and earn around $70k annually.

My question is this: is using a personal loan as a house deposit a bad idea?

[Otto Dargan]

Hello Tabitha. Welcome to the forums.

To be eligible to use a personal loan as a deposit, you have to be earning a high income and have some savings and be less than $10,000 in debt.
You will have to meet the stringent criteria for getting a home loan and personal loan.

• You'll need a high income to afford repayments on both your personal loan and home loan
• There is little or no existing debt like credit card and car loans.
• A clear credit history
• Some minimal savings
• Some lenders even look into rental history.

Due to the high qualifying criteria, it is recommended that you use a guarantor loan instead of a personal loan. If not, there are other options like using a gift from your parents.

Give us a call on 1300 889 743 or fill in our free assessment form to find out if you qualify for low deposit home loan.

Cheers,

[Tabitha J]

A guarantor loan sounds like a viable option right now. But my mom has a lot of questions regarding this. Are there any protections in place for the guarantor?

[Otto Dargan]

Hi Tabitha,

Parents are usually guarantors for their child when they are buying their first home. However, it is understandable to have doubts about being a guarantor as the parents would be using their own property as collateral for your home loan.

A limited guarantee is a way to reduce the risks associated with being a guarantor while still being able to receive the full benefits of a guarantor loan.

There are protections in place for guarantors after the Australian Banking Association enforced a new Code of Banking Practice (COBP) on 1 July 2019.

• Guarantors will have a minimum of 3 days to review their guarantee documents and consider their obligations.
• Guarantors will have a cooling-off period after signing the guarantor agreement.
• Guarantors will be encouraged to seek independent legal advice before signing.
• If the borrower gets into financial difficulty that results in defaults, then the guarantor will be notified by the bank.
• The bank will first attempt to seize assets from the borrower, before starting actions on the guarantor to repay the home loan.

You can also look into getting life, total and permanent disability, and/or income protection insurance to limit the risk of the guarantor, in case of any unfortunate circumstances. However, lenders will look into income protection insurance on a case by case basis.

Cheers,

[Otto Dargan]

That sounds about right. I do not want to keep my mom as a guarantor for a long time. So, how do I know the right time to remove her as a guarantor?

[Otto Dargan]

Hi Tabitha,

What matters to lenders is how much is the remaining loan amount against the value of your property. The ideal time to remove the guarantee is when you owe less than 80% of the loan to value ratioof the value of your property.

For example, if your loan amount was $650,000 on a $700,000 property, then you are borrowing above 90% LVR.

Once you've paid the loan amount down to $550,000 or, 80%, meaning you can remove the guarantee without paying LMI.

You shouldn’t have missed any repayments before you apply to remove the guarantor as it does not happen automatically.

We specialise in guarantor home loans.

Give us a call on 1300 889 743 or fill in our free assessment form to find out if you qualify.

Cheers,