Personal Loan As A Deposit – V1
Yes, it is possible to use a personal loan as part of your deposit to buy a home.
Although it is always better to save a deposit of your own, if you can afford the repayments of both loans and you want to buy now, you can use a personal loan as a leg up to get into the market.
Who can qualify?
You need to meet the criteria for both a home loan and for a personal loan.
To qualify you must have:
- A high income to afford both repayments.
- Little existing debt (car loans, high credit card balances, etc).
- A clear credit history.
- Some savings to make up any shortfall.
- A proven rental history (preferred).
Most lenders do not offer home loans if you have a borrowed deposit due to genuine savings requirements.
In addition to this many lenders do not offer personal loans if they are being used as a deposit on a home.
Call us on 1300 889 743 or fill in our free assessment form to find out if you can qualify to buy a home.
How much can I borrow?
It is relatively easy to borrow up to $20,000 as a personal loan and then 95% of the value of your property as a home loan.
Borrowing up to $70,000 as a personal loan is possible for high income professionals who do not have much existing debt. If you qualify for such a large loan then it may be possible to borrow 100% and buy a home with no deposit at all.
Borrowing over $20,000 as a personal loan is not suitable for most borrowers. We will only assist you to apply for these amounts if we can see mitigating reasons for why you have not been able to save a deposit yourself. Maybe you saved for a wedding, paid off your car loan, were overseas, have been promoted recently or are paying a fortune in rent.
How much do I need in savings?
There are no hard and fast rules however, lenders don’t like to see someone buying a home with no contribution of their own.
If you are on a very high income then a few thousand dollars may be all that is required whereas if you are on a lower income then you may need to have a 5% deposit.
The reason for this is that when we submit your home loan application they will take your personal loan repayments into account when they calculate your borrowing power for a mortgage. If you don’t have a high income then you can’t afford both the personal loan and home loan repayments.
Many lenders also require you to have 5% of the purchase price in genuine savings or money that you have saved yourself. If you have some savings then we’ll have more banks to choose from and you’ll have enough money to cover other costs such as stamp duty and legal fees.
How does it work?
One of our mortgage brokers will complete a preliminary assessment of your situation. If there is another option available such as a guarantor loan or 95% home loan then we’ll normally recommend those instead.
If we determine that you are suitable for this type of finance and can afford the repayments then we’ll organise a personal loan to fund your deposit.
Once the personal loan is approved we can then can submit your home loan to be pre-approved. The personal loan may be advanced before the home loan to allow you to put down a deposit when you sign the contract of sale.
You can buy at auction or via a private purchase as long as you have a valid pre-approval. Because you do not have the additional funds required if a valuation comes in low, we recommend that you avoid an auction if possible. It is often better to buy a property with a cooling off period.
Call us on 1300 889 743 or fill in our free assessment form to find out if this is suitable for you.
How much more does it cost?
Using a personal loan will cost you less in interest than you think.
Assuming you borrow $20,000 with a personal loan over 5 years at 14%, you’ll only pay an extra $22 a week in interest than if you borrowed an additional $20,000 over 5 years at a home loan rate of 5%. That works out to be $1,320 more in interest over the 5 years.
The reason is that a personal loan has a very short term and it is only a small part of your total debt. So the higher interest rate doesn’t have as big an effect as it would if your entire home loan is at that rate.
Deposit, a personal loan will make a big impact on your cash flow because the loan term is so short. The reason is that most of your personal loan repayment is paying off the debt, not paying for the interest.
There are some minor additional costs such as establishment fees, monthly fees and, in some cases, early repayment fees if you choose a fixed rate personal loan.
In some cases, we can get your home loan approved with a major lender but it is likely that we may need to use a specialist lender at a slightly higher interest rate. It all depends on the overall strength of your financial position.
How much are the personal loan repayments?
A personal loan with a term of five years will normally cost around $60 / week for every $10,000 that you borrow.
So a personal loan of $20,000 may be quite manageable however a larger personal loan will really eat into your budget unless you have a high income.
Most home buyers who use a personal loan to fund their deposit will try to pay off the personal loan first before they make extra repayments to their home loan. If your home increases in value then we may be able to increase or refinance your home loan to pay out the personal loan altogether.