You might consider using a personal loan as a deposit simply because you haven't saved enough. But borrowing money twice, for both the loan and the deposit, will put you in a much worse position financially.
And if you haven't saved a 20% deposit, you'll end up paying lenders mortgage insurance (LMI) premiums. It's possible to avoid LMI by using a personal loan to cover part of your deposit instead, but this is also a risky alternative.
How to use a personal loan for a house deposit
When buying a home, lenders need you to save at least a 5% deposit. There are some no deposit exceptions, but only in specific cases and you'll generally need parental or government help.
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. 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.
Compare home loans that allow guarantors
As a rule, most lenders need you to have at least 5% of a deposit in genuine savings.
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.
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. Here's a hypothetical scenario.
Harriet and James buy a house
Harriet and James are looking to buy their first home with an estimated property value of $600,000. They have a 10% deposit of $60,000. This means their loan amount is $540,000. Their LMI premium is an estimated $11,772 according to Finder's LMI premium calculator.
Here's how the couple's costs break down depending on whether they buy a house with a 10% deposit and pay LMI or use a personal loan to bring their deposit up to 20%.
Small deposit, paying LMI
Assuming a home loan interest rate of 2.00% over 30 years and a $540,000 loan amount, here are Harriet and James's costs:
Monthly repayments at 2.00% over 30 years = $1,995 a month.
They pay $178,540 in interest over the life of the home loan.
What if the couple decide to borrow a further $60,000 as a personal loan? This would bring them up to a 20% deposit and save them over $11,000 in LMI premiums.
Their home loan amount falls to $480,000 but they now have 2 loans to repay. Let's assume the couple take out an unsecured personal loan with a reasonable rate of 7.50% over 6 years.
Home loan repayments at 2.00% over 30 years = $1,774 a month.
They pay $158,702 in interest over the life of the home loan.
Their personal loan has a rate of 7.50% over 6 years. Your monthly repayments = $1,037.
Over the 6-year life of the personal loan they pay $14,693 in interest.
All together, Harriet and James's loan costs in this scenario are:
Total monthly repayments (on 2 loans) = $2,811
Total interest costs (on 2 loans) over 30 years (6 for the personal loan) = $173,395
By avoiding LMI and getting a personal loan to make up the 20% deposit, the couple actually pay less overall. 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. The average borrower is probably not in a position to pay that much every month.
If you avoid LMI and get a personal loan instead, your monthly loan repayments are much bigger. In the long run you technically pay a little less interest because you repay the personal loan debt much faster. But those monthly repayments are very high.
Capitalising LMI
But Harriet and James could borrow the LMI costs along with their 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 2.00%), the monthly repayments would rise to $2,039. That's only $44 a month more.
Is it a bad idea to use a personal loan as part of my deposit?
As the numbers above show, you could technically save on interest by getting a personal loan to cover part (though not all) of a deposit. But it's not a great idea. 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.
Also, with a small deposit and multiple debts, you don't have much equity in the property. This means you don't own much of your house. It's mainly debt. 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.
If you're thinking about avoiding LMI by taking out a personal loan, it's recommended that you consult your lender directly to discuss the terms and features of their loans, as well as their LMI provider policies.
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.
Why you can trust Finder's home loan experts
We're free
You won't pay any more by taking out a home loan with us. Better still, we regularly run exclusive deals that you won't find on any other site – plus, our tables make it easy to compare loans.
We're experts
We've researched and rated dozens of home loans as part of our Finder Awards. We provide unique insights and our in-house experts regularly appear on Sunrise, 7News and SBS News.
We're independent
Unlike other comparison sites, we're not owned by a third party. That means our opinions are our own and we work with lots of home loan lenders, making it easier for you to find a good deal.
We're here to help
Since 2014, we've helped 150,000+ people find a home loan by explaining the nitty gritty details simply and clearly. We'll never ask for your number or email. We're here to help you make a decision.
Frequently asked question about personal loan for a house deposit
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.
Richard Whitten is a money editor at Finder, and has been covering home loans, property and personal finance for 6+ years. He has written for Yahoo Finance, Money Magazine and Homely; and has appeared on various radio shows nationwide. He holds a Certificate IV in mortgage broking and finance (RG 206), a Tier 1 Generic Knowledge certification and a Tier 2 General Advice Deposit Products (RG 146) certification. See full bio
Richard's expertise
Richard has written 532 Finder guides across topics including:
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?
How likely would you be to recommend Finder to a friend or colleague?
0
1
2
3
4
5
6
7
8
9
10
Very UnlikelyExtremely Likely
Required
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
Important information about this website
finder.com.au is one of Australia's leading comparison websites. We are committed to our readers and stands by our editorial principles
We try to take an open and transparent approach and provide a broad-based comparison service. However, you should be aware that while we are an independently owned service, our comparison service does not include all providers or all products available in the market.
Some product issuers may provide products or offer services through multiple brands, associated companies or different labeling arrangements. This can make it difficult for consumers to compare alternatives or identify the companies behind the products. However, we aim to provide information to enable consumers to understand these issues.
We make money by featuring products on our site. Compensation received from the providers featured on our site can influence which products we write about as well as where and how products appear on our page, but the order or placement of these products does not influence our assessment or opinions of them, nor is it an endorsement or recommendation for them.
Products marked as 'Top Pick', 'Promoted' or 'Advertisement' are prominently displayed either as a result of a commercial advertising arrangement or to highlight a particular product, provider or feature. Finder may receive remuneration from the Provider if you click on the related link, purchase or enquire about the product. Finder's decision to show a 'promoted' product is neither a recommendation that the product is appropriate for you nor an indication that the product is the best in its category. We encourage you to use the tools and information we provide to compare your options.
Where our site links to particular products or displays 'Go to site' buttons, we may receive a commission, referral fee or payment when you click on those buttons or apply for a product. You can learn more about how we make money.
When products are grouped in a table or list, the order in which they are initially sorted may be influenced by a range of factors including price, fees and discounts; commercial partnerships; product features; and brand popularity. We provide tools so you can sort and filter these lists to highlight features that matter to you.
Please read our website terms of use and privacy policy for more information about our services and our approach to privacy.
We update our data regularly, but information can change between updates. Confirm details with the provider you're interested in before making a decision.
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?
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.