Personal loan as a house a deposit?


Personal loans and credit cards get people in to trouble in a lot of ways. Credit cards won't get you in to a mortgage (unless you have a ridiculous income but even still) but a personal loan can be a step closer. It could also take you three steps back.

What do banks think of personal loans?

As far as them being on your home loan application they're neither smiled at or frowned upon unless of course you miss repayments or are late. Quite simply all the bank looks at is how much the personal loan takes from your income. They do this to decide how much you can afford while you're paying the loan.

How can you use it as a deposit?

Also not that straightforward. Essentially you're borrowing your deposit. Most of the lenders I have that offer personal loans will cap them at $50,000 though. This just means unless you're a first home buyer (just because FHB's don't pay Stamp Duty) looking to buy a house for $250,000 your personal loan deposit isn't going to get you out of paying Lenders Mortgage Insurance. Typically speaking, $50,000 will get you into a property valued around the $500,000-$550,000 mark. This is a very approximate figure that only takes in to account rough numbers for Stamp Duty and other expenses such as conveyancing. Alternatively you could use a personal loan to "top-up" your deposit.

How much will it affect my borrowing power?

I can't give you an exact answer for a couple of reasons. The main one being that every bank is different, if only you knew a broker that could do all the running around though to figure out where best to place you... But to give you an idea, one of the second tier lenders knocked almost $70,000 off the max borrowing power of 2 of my clients. Just a rough number again, every application is different as is every lender, give me a call if you want a good idea of where you stand with this sort of thing and we can look at it before you start door knocking banks and putting in applications.

On the flip side, I was working with potential clients over the weekend just passed and we ran a couple of scenarios where we dropped a couple of credit cards and eliminated all personal loan debt. We were able to increase their borrowing power to where they wanted it but we've pushed them back a year so that they can get everything in order. The thing that gets overlooked is the burden all these small amounts of debt can have on your own cashflow. I think if this is something you are considering you really need to be comfortable with the repayments of not only your personal loans but think long and hard about what will happen if rates went up a couple of percent, if you're planning kids how that's going to affect your lifestyle, weddings, business ventures, whatever you may have planned. A mortgage is a lifelong commitment in many cases and the planning needs to be on point otherwise it can cause problems down the track. These are all things I discuss with any one looking for credit but you really need to make sure you're comfortable with it.

The summary

I think personal loans can play a part in the home loan process, I think your incomes need to be solid and strong though. You need a strong exit strategy and to be completely honest if you can afford both a personal loan and a mortgage I would strongly suggest pouring any excess funds into clearing these debts as quickly as possible. As always. get a second opinion from someone qualified to do so.