You can use a personal loan as part of your home loan deposit. This can be especially useful when your lender asks for a bigger deposit than you can pay. However, to qualify, you need to meet a few strict criteria.
Personal Loan as a Deposit Requirements
To take a personal loan as payment for a deposit, you usually need a high income. For most lenders, this is the first requirement. You also need to have a low or preferably non-existent debt and some savings of your own.
Here is the full list of requirements you can expect as a first-time buyer:
- High income
- Good credit history
- Little debt, including car loans, credit card balances, or other loans
- Some savings, though the actual amount may vary depending on your lender
- A good rental history
It’s good to know that most lenders will not let you use a personal loan as a deposit on a home. Only certain lenders do, and they usually only do so if you have some savings already.
How Much You Can Borrow
For most borrowers, $20,000 is the maximum amount they can hope to get as a personal loan. High-income individuals may be able to borrow up to $70,000, provided they don’t have other debts.
However, if you can borrow a large sum, you may be able to get a home loan without a deposit. Therefore, make sure you compare home loans first to see all your options.
Borrowing $20,000 for a personal loan will not usually affect your ability to get a mortgage. You should be able to get up to 95% of your home financed through a home loan.
When it comes to a personal loan as a deposit, both lenders and brokers may want to hear the details of why you don’t have a deposit. This should not be a problem if you have recently paid off another loan, are paying a high rent, or have recently married.
As already noted, even if you use a personal loan as a deposit, you will still need some savings. The savings required depend on your lender. Most lenders feel comfortable giving you the green light if you have a high income and a few thousand dollars in savings.
Otherwise, you may need a 5% deposit of the total value of your home, preferably in genuine savings. When assessing your home loan application, lenders take into account the personal loan when determining your borrowing power.
Having some savings gives you more options and better home loan rates. It also allows you to pay the stamp duty and other legal fees.
How Much Does a Personal Loan Cost?
A personal loan usually comes with a short term. Also, it amounts to only a relatively small percentage of your total debt. For these reasons, it doesn’t cost as much as other loans.
Let us say you want to take a $20,000, five-year personal loan at 14% interest. You will be paying around $95 more in interest every month than if you borrowed the same amount over the same term at standard home loan rates.
At the end of the term, you will pay less than $1,500 extra in interest. In addition, a personal loan can have a positive benefit on your long-term cash flow.
It’s good to know that on top of interest, a personal loan may come with other fees. These commonly include establishment fees or early repayment fees. Some lenders may also feature additional monthly fees, but these are in most cases negligible.
Personal loans tend to be one of the more manageable loans you can take. For every $10,000 you borrow on a five-year term, you can expect to pay around $250 every month.
In most cases, paying off the personal loan before making extra home loan repayments is more convenient. This is what people who get a home loan using a personal loan as a deposit do.
However, if the value of your property grows, it may be possible to refinance your home loan later. In that way, you can pay off the personal loan faster.
How Do You Get a Personal Loan as a Deposit?
First and foremost, you want to talk with one of our home loan consultants. He or she can look at your financial situation and recommend the right lenders. In some cases, you may find that you have other options as well, such as a 95% home loan or a guarantor loan.
You may want to consider using a guarantor loan before getting a personal loan. This type of loan can help you to secure the home loan you want while giving you more options in terms of lenders. Make sure you compare home loans carefully.
As soon your personal loan gets the green light, we can send your home loan application to lenders. When the home loan is pre-approved, you can use the money from the personal loan as a deposit.
Using a personal loan as a deposit doesn’t limit your choices as a first-time buyer. However, you may want to avoid buying your property at an auction. This is because a low valuation may call for more funds than you have available.
What to Do Next
Exploring your options is something you should definitely do when it comes to a home loan. We recommend you begin with the following:
- Get advice about your deposit options
- Calculate your borrowing power using the right calculator
- Talk to an expert on personal loans about your options
This information is general in nature, and you should always seek professional advice when making financial decisions.