If you are a first-time homebuyer struggling to save for a house deposit, you may be wondering if there are quicker ways of making the down payment. There are certainly other options to consider, but they can carry more risk.
Using a personal loan as a deposit
A few specialist lenders will allow you to use a personal loan as part of your home loan deposit, as long as you have some existing savings and meet strict criteria.
Amongst these requirements, you would typically need to be a high-income earner. This is because the lender would need to be confident that you could afford to pay off your loan, your mortgage, and all your other expenses each month.
You would also need:
- a good credit and rental history,
- little debt, and
- to have some savings.
You would need to demonstrate sound financial management to lessen your overall risk profile. You may, however, still pay higher interest rates and charges for a home loan under these circumstances.
Using genuine savings for your deposit
Most lenders don’t allow money for your deposit to come from a personal loan, given the inherent risk of this strategy. Rather they require a deposit to come from ‘genuine savings’.
These are savings that could also come from:
- an inheritance,
- monetary gifts,
- tax refunds,
- sale of assets.
In essence, money that is not repayable to anyone and can be safely locked away in the mortgage.
The value of having as large a deposit as possible is that it protects you from negative equity. This happens when housing prices fall, but the level of debt on a property does not. Therefore the homeowner is left paying a mortgage that is more than the value of the property; selling the home would not clear the debt.
Saving for a 20% deposit also means that you are not liable for Lenders’ Mortgage Insurance – a premium that protects the lender in the aforementioned circumstances, or should you default on your home loan and the sale of the property not cover your outstanding debt on it.
With a healthy-sized deposit you can avoid having to pay this extra charge, and you will, of course, lessen the amount of interest that you pay on your home over the long term.
Other options to raise a deposit
There are other options that you could consider to fast-track property ownership – such as borrowing funds from family rather than a financial institution.
As long as repayment is not expected, most lenders accept financial contributions that are gifted from close family. Often they will require a statutory declaration that these funds do not need to be repaid. But you could choose to do so, in time, if your finances allowed it.
Likewise a guarantor loan could be an option. In this case you do not need a deposit at all and you are not liable for Lender’s Mortgage Insurance. Close family members, usually parents, tend to serve as guarantors. They put up their property or savings as security against a percentage of your home loan. Because their assets are at risk if you default on your home loan payments, it’s important that everybody fully understands the risks involved.
A guarantor loan will also give you an increased choice of lenders. This could mean a more competitive product in terms of the interest rates, fees and charges you will pay on your mortgage.
What are the costs of using a personal loan?
While using a personal loan to finance part of your deposit is not suitable for most, it can make sense and be a viable option for some borrowers. It’s important to carefully calculate whether it is the right decision for your circumstances.
In terms of the costs involved, let’s say you want to take out 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.
But at the end of the term, you will pay less than $1,500 extra in interest. A personal loan could have a positive benefit on your long-term cash flow, particularly if it enables you to buy a house in a rapidly rising housing market.
It’s good to remember though that on top of interest, a personal loan may come with other fees. These commonly include:
- establishment fees,
- early repayment fees,
- additional monthly charges.
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.
As soon your personal loan gets the green light, an uno adviser 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.
While using a personal loan for a deposit doesn’t limit your choices as a first-time buyer, 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
With Alexi Neocleous
The information in this article is general in nature. Please seek advice from a licensed professional when making financial decisions.