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.
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
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 Value||Deposit Amount||Loan Term||LMI Payable|
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 Amount||Interest rate||Loan Term||Interest cost||Total Loan Cost|
|$30 000||13.95||7 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 Amount||Interest rate||Loan Term||Interest cost||Total Loan Cost|
|$30 000||13.95||1 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.
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