Can I use a personal loan for a house deposit?

You could use a personal loan to cover part of your house deposit. But it's usually a bad idea.

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Richard Whitten

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Key takeaways

  • You might consider using a personal loan to cover part of your deposit when buying a house. In theory you could stretch your budget this way.
  • And if you get your deposit up to 20% you can avoid paying lenders mortgage insurance (LMI) premium.
  • But using a personal loan in this way is a bad idea. It is against many lenders' policies and can reduce your loan size or get your application rejected.

Can I use a personal loan for a house deposit?

When buying a home, lenders typically need you to save at least a 5% deposit.

If you wanted to buy an $800,000 house then a 5% deposit would cost you $40,000. And you'd have to borrow the remaining $760,000 (and pay a small fortune in LMI premiums).

In theory you could borrow the $40,000 as a personal loan, borrow the rest as a home loan and repay both debts. In practice most lenders would reject your application immediately because they need evidence of your savings to trust you can repay the loan.

And a $40,000 debt with high interest rate is the opposite of that.

Supplementing your deposit with a personal loan

Using the example above, let's say you have a 15% deposit in cash for an $800,000 home. That's $120,000.

If you borrowed an extra $40,000 with a personal loan you'd hit 20% and avoid LMI.

It's a slightly more realistic scenario than the first one. But it's still a really bad idea and the lender would likely reject your application if you've just taken out a $40,000 personal loan.

How to avoid paying LMI with a personal loan

LMI is expensive. In the example above, if you bought an $800,000 house with a 5% deposit the LMI premiums would exceed $34,000.

You could avoid LMI by taking out a personal loan. If you had a 5% deposit you'd need to borrow a further 15% to make a 20% deposit. Once you hit 20% of a property's value, lenders don't charge LMI.

While this approach could work, taking out a personal loan to avoid LMI means taking on a second debt and increases your monthly repayment obligations by a lot.

Is it a bad idea to use a personal loan as part of my deposit?

Taking on 2 debts increases your risks and drastically increases how much you have to repay each month.

Lenders may also reject your application because a personal loan will impact your credit score. You look like a riskier borrower when you have a small deposit and a second debt too.

Given that you can also capitalise LMI costs and borrow them with the loan, paying LMI lets you both enter the property market sooner while avoiding the extra monthly costs of paying off 2 loans.

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Expert insight: Stay away from cocktail loans

"In our world this is a big no-no. We always discourage 'cocktail loans' in order to get around LMI; this is against most lender policies and can also dramatically reduce the borrowing power you have. The way that banks assess your ability to borrow will favour mortgage debt over personal debt. Whilst LMI can be an extraordinary expense, a broker will always look at other options first. Such as – do you have a family member who will provide a security guarantee, do you qualify for any first home owner grants, do you quality for the home guarantee scheme, are there funds from the bank of mum and dad available to you, does your profession entitle you to an LMI waiver or is LMI simply the best option for you?"

Matt Turner's headshot
Mortgage broker, GSC Finance Solutions

Does borrowing a house deposit with a personal loan save you money?

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

The answer is more complicated than you might think.

Example

Let's say you are looking to buy a home with an estimated property value of $600,000. You have a 10% deposit of $60,000. Your loan amount is $540,000 and your LMI premium is an estimated $11,772 according to Finder's LMI premium calculator.

Here's how your costs break down depending on whether you buy a house with a 10% deposit and pay LMI or use a personal loan to bring the deposit up to 20%.

Option 1: Small deposit, paying LMI

Assuming a home loan interest rate of 5.00% over 30 years and a $540,000 loan amount, here are your costs:

  • Monthly repayments at 5.00% over 30 years = $2,899 a month.
  • You pay $503,582 in interest over the life of the home loan.
  • LMI costs = $11,772

You can use Finder's home loan repayment calculator to check the maths for yourself.

Option 2: Using a personal loan

What if you decide to borrow a further $60,000 as a personal loan? This would bring you up to a 20% deposit and save over $11,000 in LMI premiums. Your home loan amount falls to $480,000 but you now have 2 loans to repay.

Let's assume the couple take out a personal loan with a rate of 12.0% over 6 years.

  • Monthly personal loan repayments = $1,174.
  • You pay $24,457 in interest over 6 years.

So this is already costing more than the LMI premium. However, you have a smaller home loan now at just $480,000.

  • Home loan repayments at 5.00% over 30 years = $2,577 a month.
  • You pay $447,628 in interest over the life of the home loan.

You can use Finder's personal loan repayment calculator to check the maths for yourself.

Summing it up

  • Total cost of option 1 = $515,354
  • Total cost of option 2 = $472,085

So you could technically save money with the personal loan. This is because a 6-year debt, even with a higher interest rate, ultimately costs less interest than a 30-year mortgage debt.

But the downside is the much higher monthly repayments. In option 2 your monthly repayments on both loans would total $3,751 versus $2,899 with option 1.

And your chances of getting a home loan approved in this scenario are much lower too.

Option 3: Capitalising LMI

But you could also borrow the LMI costs along with your home loan. This is called capitalising LMI. In the example above, buying a home with a 10% deposit and LMI would mean a loan amount of $551,772 instead of $540,000.

In this scenario (30-year loan with a rate of 5.00%), the monthly repayments would rise to $2,963. That's $64 a month more.

Of course, you end up paying more interest over 30 years. In this case, $514,560 instead of $503,582. That does end up being slightly cheaper than the initial LMI premium.

Get a guarantor and buy a house with no deposit or personal loan

If your parents own their own home and really like (or trust) you, you might be in luck. Your parents could as a mortgage guarantor, use the equity in their home to back your home loan application. If a lender agrees, you might be able to borrow 95% or even more of your property's value and avoid LMI.

It isn't an option for most buyers but it does work for some.

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Senior Money Editor
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Richard Whitten is Finder’s Senior Money Editor, with over eight years of experience in home loans, property, credit cards and personal finance. His insights appear in top media outlets like Yahoo Finance, Money Magazine, and the Herald Sun, and he frequently offers expert commentary on television and radio, helping Australians navigate mortgages and property ownership. Richard started his career in education and textbook publishing in South Korea. He holds multiple industry certifications, including a Certificate IV in Mortgage Broking (RG 206) and Tier 1 and Tier 2 certifications (RG 146), as well as a Bachelor of Education from the University of Sydney and a Graduate Certificate in Communications from Deakin University. See full bio

Richard's expertise
Richard has written 764 Finder guides across topics including:
  • Home loans
  • Credit cards
  • Personal finance
  • Money-saving tips
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2 Responses

    Sami's avatar
    SamiAugust 23, 2023

    Hello, We are looking at purchasing our dream land for 210k, and then building on it in the middle of next year once we have saved more. total loan will be approx. 600k once built.

    Our initial cash deposit is only $11k so we are borrowing 20k from a pl to make the difference. for the deposit.

    How hard is it going to be for us to borrow on a construction loan next year if we have the land loan and the personal loan?

      Richard Whitten's headshotFinder
      RichardAugust 23, 2023Finder

      You should really talk to a lender about this. It’s probably not impossible but it’s quite risky to use a personal loan as a deposit.

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