Can I use a personal loan for a house deposit?

Find out if it’s possible to avoid one of the most expensive upfront costs of a home loan with a personal loan.

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If you haven't saved a 20% deposit for your property purchase, you're likely to end up paying lenders mortgage insurance (LMI). This is an insurance policy that covers your lender in the event you default, and the cost of LMI can be thousands of dollars. With this in mind, we explored whether or not it's possible - and cost effective - to avoid it by taking out a personal loan.

Did you know? Even if your loan is approved by your lender, don’t assume that you will be eligible for LMI. Australian providers may deem you ineligible to pay LMI based on factors such as your income. In the event that you are rejected for LMI by one of the major providers, such as QBE or Genworth, you may want to apply with a lender who uses a different LMI provider, or one which self-insures themselves.

How To Avoid Paying LMI Through a Personal Loan

You could be able to avoid LMI by taking out a personal loan to finance the gap between the your deposit and 20% of the property's price. While this approach can be useful in a number of circumstances, taking out a personal loan to avoid LMI can work out to be more expensive down the track.

Needless to say, if you are looking to avoid LMI by taking out a personal loan, you will need to meet certain criteria, such as proving full time employment, genuine savings and a positive credit history.

Does Avoiding LMI Actually Save You Anything?

So when you avoid paying LMI by taking out a personal loan, will it actually save you money in the long run?

We’ve put together a hypothetical situation that highlights the differences between the cost of a home loan when LMI is paid, compared with the cost of avoiding LMI by taking out a personal loan.

All calculations are provided for illustrative purposes only.

Harriet and James

avoid LMI with a personal loan

Using the Genworth LMI Premium estimator, we can work out the LMI premium payable on a home loan.

To demonstrate, Harriet and James are looking to buy their first home in Surry Hills with an estimated property value of $600 000 with a 15% deposit. They would like to borrow 85% of the purchase price over a loan period of 30 years.

They received a gift from their parents to help them buy a home, which they'll use to pay the LMI upfront. In this case, the LMI premium would amount to $6,579 (excluding stamp duty).

Estimated Property ValueDeposit AmountLoan TermLMI Payable
$600,000$90,00030 years$6,579

However, if the couple hadn’t received the gift, and instead decided to capitalise the LMI into their loan over 30 years with 5% interest, the additional repayment would be $50 per month, or a total of $12,714.29.

Avoiding LMI By Taking Out a Personal Loan

On the other hand, if Harriet and James were not eligible for LMI or wanted to avoid it, they may decide to take out a personal loan to finance the remaining 5% of the property price. If they took out a personal loan with 13.95% interest, the monthly repayments would be $561 over a 7 year period, and the total interest payable would be $17,155.

Loan AmountInterest rateLoan TermInterest costTotal Loan Cost
$30 00013.957 years$17,155$47,155

The total cost of this personal loan would therefore be $47 155.

However, if Harriet and James realised that the maximum loan period of 7 years for the personal loan was going to cost them too much in interest, they might try to pay off the loan in a shorter time period of just 1 year. With 13.95% interest, the monthly repayments would now be $2,693 and the total interest payable would be $2,315.

Loan AmountInterest rateLoan TermInterest costTotal Loan Cost
$30 00013.951 year$2,315$32,315

The total cost of the loan for 1 year would be $32,315.

From this calculation, we can see that it would be cost effective for the couple to pay the LMI upfront to avoid the high interest charged on the personal loan. However, it is important to remember that the interest and duration of these loans will vary significantly depending on the lender and LMI provider. Moreover, if the couple were not eligible for LMI, a personal loan could be a viable option to help them buy.

Should LMI Be Avoided By Taking Out A Personal Loan?

As reflected in the above example, it's more expensive to avoid paying LMI by taking out a personal loan. Although LMI is designed to protect the lender, you can also benefit from paying the insurance upfront and not incurring the high interest rates of a personal loan.

Avoiding LMI by taking out a personal loan will add an additional line of credit next to your account which could negatively impact your credit score.

Paying LMI will also enable you to enter the property market sooner and it could provide you with greater capital gains than you would receive by saving the 20% deposit or taking out a personal loan.

If you are thinking about avoiding LMI by taking out a personal loan, it is recommended that you consult your lender directly to discuss the terms and features of their loans, as well as their LMI provider policies.

Compare home loans with guarantor options

The loans below allow you to use a guarantor to help avoid LMI, and many of them also allow you to borrow up to 95% of the property value.

If you're still interested in using a personal loan to avoid LMI, you can also start a comparison of them too.

Name Product Interest Rate (p.a.) Comp. Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment
Newcastle Permanent Building Society Fixed Rate Home Loan
4.11% p.a.
$0 p.a.
A fixed rate loan which allows extra repayments, and charges a low application fee.
Greater Bank Great Rate Home Loan
2.60% p.a.
$0 p.a.
Fund the construction of your new family home with a very competitive variable interest rate.
Newcastle Permanent Building Society  Premium Plus Package Fixed Rate
3.72% p.a.
$395 p.a.
$2,000 refinance cashback
Enjoy a discounted fixed rate and the ability to package the loan with other financial products. $2,000 cashback for eligible refinancers borrowing $250,000 or more.
IMB Fixed Rate Home Loan
2.87% p.a.
$6 monthly ($72 p.a.)
NSW and ACT customers only. Lock in a low fixed rate for two years. Available with a 5% deposit.
Heritage Bank Fixed Rate Home Loan
4.23% p.a.
$8 monthly ($96 p.a.)
Get a fixed rate for two years and borrow up to 95%.
Westpac Flexi First Option Home Loan
2.72% p.a.
$8 monthly ($96 p.a.)
Up to $3,000 refinance cashback.
A flexible and competitive variable rate loan. Eligible borrowers refinancing $250,000 or more can get $2,000 cashback per property plus a bonus $1,000 for their first application. Other conditions apply.
Newcastle Permanent Building Society Fixed Rate Home Loan
3.83% p.a.
$0 p.a.
Split you home loan for free with one of the lowest fixed home loan rates.
Heritage Bank Advantage Package Fixed
3.15% p.a.
$350 p.a.
Get a partial offset account and flexible repayments with this package loan.
Newcastle Permanent Building Society Premium Plus Package Home Loan
4.15% p.a.
$395 p.a.
$2,000 refinance cashback
No application fee and 100% offset account. $2,000 cashback for eligible refinancers borrowing $250,000 or more.

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