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Personal Loans for House Deposit
Trying to make up the funds for your dream home deposit? Compare personal loans with Savvy to assess your options for making up the difference for your house deposit.
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Can I get a personal loan for my house deposit?
Yes – it’s possible to get a personal loan to make up the required funds if you’re wanting your deposit to reach 20% of your home’s value. Homebuyers look to this number specifically as it’s the threshold for lenders to apply LMI, which is a cost associated with insuring lenders in the event that their borrowers become unable to fulfil their repayment requirements. Personal loans in themselves are relatively easy to apply for with fast approval times, making them an appealing option for those looking to edge their deposit amount closer to 20%.
LMI is a substantial cost to be taken on by a homebuyer in addition to their repayments, typically costing thousands to tens of thousands of dollars depending on the size of the loan. This is why homebuyers without the funds to afford a 20% deposit might look to a personal loan as a means of sidestepping it; they can be a crucial way to save money in the long term, particularly if you’re able to pay off your personal loan quickly and not accumulate more in interest. However, it’s important to note that this isn’t always the best avenue for homebuyers to take for their mortgage needs.
Personal loans come with much higher interest rates than home loans, meaning that the amount you’ll be paying in interest is more likely to mount 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 comfortably over $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 have to repay a second loan with a high interest rate for years down the track. It’s important to assess these numbers ahead of time so that you know which option is the best for you; there are LMI calculators available to use online which can help with this.
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 important to note that not every homebuyer has someone who is a viable candidate to be a guarantor on their home loan. This automatically rules this out as an option in instances such as these. Additionally, 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. Additionally, guarantors may have trouble getting loans of their own during this period and are restricted with what they can do with an asset, such as their home, if required to use it as security.
Types of personal loan
With an unsecured personal loan, you can potentially borrow as much as $75,000 without the need to attach any valuable assets, such as your car, as security. These loans are the most widely available and often the quickest, with same-day approval possible.
Secured personal loans, on the other hand, make use of collateral. This lowers your risk profile in the eyes of a lender, potentially lowering your interest rate and expanding your borrowing power beyond what you may be able to get through an unsecured loan.
Variable interest rates remain open to fluctuation during your term. This means you can benefit from decreasing rates and save on your loan if the market heads in that direction, although you’ll also pay more if rates start rising.
Fixed interest rates are locked at the beginning of your loan and remain constant throughout your repayments. This acts as a valuable protection against interest rate increases, as your loan will be unaffected, but you’ll miss out on potential drops as well.
If you’re paying off multiple debts at the moment, particularly those with high interest (such as credit card debts), consolidating them into one payment can not only make them more convenient to manage but also potentially save you money overall.
Looking to take off on a holiday with your family but want to pay it off at your own speed? Travelling can be expensive, so you can distribute the cost of your next trip over a period you’re more comfortable with by taking out a personal loan to pay for it.
There are so many costs that go into making your dream wedding a reality, from venue hire to catering to dresses and suits and so much more. By taking out a personal loan, you can start planning the big day you want, even if you can’t pay for it upfront.
Home improvements are desirable for a range of homeowners to help keep their living space fresh and interesting, not to mention increase its value. You can get past the financial hit of renovations with a personal loan paid in instalments.
Personal loans aren’t limited to PAYG employees, though. If you’re running your own business, you can still be approved for financing by submitting tax returns and other alternative documents instead of payslips and utilise your funds however you wish.
There’s a variety of expenses which come with being a student, ranging from the cost of your courses, textbooks and computer to your accommodation. Taking out a personal loan can make these costs more manageable by spacing them out.
Some lenders offer green personal loans, which are designed to be used for energy-efficient appliances and products such as solar panel and air conditioning installation in your home. You can qualify for lower interest rates and fees with this loan.
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The pros and cons of getting a personal loan for your house deposit
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
Frequently asked questions about personal loans for a 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 that in savings to qualify. From a mortgage lender’s perspective, the lower the percentage of your deposit is personal loan funds, the better.
No – there are some lenders who require genuine savings to make up the entirety of the house deposit. This may mean that you don’t qualify for their home loans and will be forced to pay LMI if you don’t have a guarantor. However, if you took out a personal loan six months ago, for instance, and still have those funds sitting in your account, these will be considered genuine savings and can be used for your house deposit.
No – there are some lenders who require genuine savings to make up the entirety of the house deposit. This may mean that you don’t qualify for their home loans and will be forced to pay LMI if you don’t have a guarantor. However, if you took out a personal loan six months ago, for instance, and still have those funds sitting in your account, these will be considered genuine savings and can be used for your house deposit.
There are a number of factors you should compare on personal loans, including:
- Interest rate: 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: if you want a particularly short or long loan term, you should look for lenders that offer between one and seven years
- Features: additional features like extra repayments and redraw facilities add flexibility to your loan experience
Your credit rating and your ability to service your loan are two of the biggest factors in this regard. If you have a lower interest rate, you may be forced to go to a smaller online lender who specialises in bad credit finance. However, if you’re asking for more than a lender believes you can comfortably afford, no lender will approve your application. Ensure you work out exactly how much you can afford to repay easily prior to applying.
Yes – if you’re a first homebuyer, you may qualify for the First Home Loan Deposit Scheme, which provides a guarantee that allows you to apply with a deposit as little as 5% of your home’s value.
No – this would be considered too high-risk by your mortgage lender. Additionally, large transactions such as a house deposit on a credit card are highly inadvisable, given the interest rates that kick in at the end of the month.
Helpful personal loan guides
Still looking for the right personal loan?
Personal loans come in all shapes and sizes, so read more about the ways you can use them, as well as how they might work for you.