Taking out a personal loan for a home deposit – is it wise?

When purchasing a home, you’ll often be advised to make a down payment to reduce interest and the amount you’ll pay back for the loan. Unfortunately, not everyone can afford this deposit right away and some resort to taking out a personal loan. But is this advisable?

JustMoney contacted two of the biggest banks in South Africa to help us answer this question.

Tip: Do you know you can apply for a personal loan with JustMoney? Click here for a quote.

Saving is ideal

Lee Mhlongo, CEO of FNB Home Finance says the decision to purchase a home is a long-term commitment and comes with unexpected costs that will put pressure on your cash flow. Therefore it’s always ideal to save or use any available cash for the biggest deposit possible.

Your financial services provider can help you through this journey, so be sure to consult them if time and cash allow, Mhlongo says.

What if you can’t save?

Mhlongo says if you don’t have savings or cash available, a loan for the full purchase value of the home is the next best option. A personal loan should be the last resort, he advises.

Geoffrey Lee, managing executive of home loans at Absa, explains that using this mechanism could have affordability implications.

“Your income, current debt commitments, and monthly household expenses are all considered to determine your affordability, and ultimately your ability to take on additional debt,” says Lee.

Mhlongo says you need to establish whether you will still be able to make both repayments - home loan and personal loan - should unforeseen costs arise.

According to Corne Jordaan, spokesperson for FNB Loans, using a personal loan offers the following benefits:

• The interest rate on a personal loan is generally fixed and not linked to the prime interest rate. This results in a fixed monthly repayment which makes budgeting easier.
• Additional funds can be paid in to a personal loan at any point in order to pay the loan off sooner, or settle without incurring any penalty fees. When paying in more than the normal minimum monthly instalment, it is always advisable to do so towards the loan with the highest interest rate.
• Insurance cover is offered as part of the loan and is often worked into the quoted monthly instalment. This covers clients in the event of death, permanent- or temporary disability, unemployment or inability to earn an income.
• The term of a personal loan is much shorter than a home loan, which means your deposit will be paid off faster.
• Apart from helping to finance a deposit, a personal loan may also be useful to cover some of the additional costs associated with buying a property such as legal fees, connecting utilities or even a fresh coat of paint.

What are the disadvantages?

The interest rate charged on a personal loan is typically higher than that of a home loan, says Jordaan.

This is because a home loan is backed by an asset (the home) and a personal loan is not.

Secondly, taking a personal loan to pay for a deposit will result in two sets of monthly service fees – for the home loan and the personal loan.

Lastly, Jordaan says having two loans results in more administration for you to keep track of and manage.

“In this case, it may be best to take up both your home loan and your personal loan with the same credit provider so that your accounts can still be managed in one place,” he advises.

There is no standardised way of financing your deposit, but Lee suggests that before you purchase a house, you should do the following:

• Buy within your means. Always be realistic, open, and honest.
• Prepare a detailed budget, review your bank statements and consider all your expenses, however big or small.
• Remember, not being able to afford the instalment of your loan is worse than the fleeting awkwardness of being declined upfront.
• Use the tools available on your banking website and obtain expert advice from a home loans industry specialist.
• Consider the impact of an interest rate hike on your monthly instalment.

Furthermore, it is essential that you as a home buyer also understand:

• What the monthly repayments will be,
• The potential savings of placing a larger deposit, and
• Detailed costs of the new home loan, including registration charges, transfer costs and attorney fees.

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