The question “home loan or personal loan, which is better” is one of the most common – and important – decisions you’ll face. In this article, we explore how each loan type works in Australia, compare their uses, rates and costs, and explain which option tends to be better for first-time buyers. Ultimately, for most property needs, a mortgage will be the smarter choice – but we’ll explain when a personal loan might make sense, and caution about the pitfalls of using unsecured debt for home projects. Backed by insights from ASIC, APRA, Australian banks, and expert advice from a mortgage broker in Brisbane, buyers can trust, this article will help you choose the right financing path with clarity and confidence.
How Home Loans And Personal Loans Work In Australia
Both home loans and personal loans are regulated under Australia’s National Consumer Credit Protection Act, meaning lenders must comply with ASIC’s responsible lending rules. But they function very differently:
- Home Loans (Mortgages): These are large loans secured against the property. Lenders (banks/credit unions) assess your income, expenses, and deposit and require a valuation of the home to be purchased. You typically need a deposit, often ≥5–20% of the property price, and proof of repayment ability. If your deposit is under 20%, you usually pay Lenders Mortgage Insurance (LMI) to protect the bank. Mortgage interest rates are usually variable (with occasional fixed-term deals) and are generally several percentage points lower than unsecured loans. APRA and RBA data show that Australian owner-occupier mortgages (P&I) currently average around 5.9% p.a. for new loans. Home loans can span 15–30 years, making monthly payments affordable.
- Personal Loans: These are typically unsecured loans for personal purposes (e.g. cars, holidays, renovations). With no property as collateral, interest rates are significantly higher. MoneySmart notes personal loans are usually not secured by an asset and run 2–7 years. Banks specify ranges – for example, CommBank’s unsecured personal loans range from 7.75% to 20.25% p.a, ANZ’s from 7.49% to 19.99%, NAB’s from 7.49% to 20.49%, and Westpac’s from 7.99% to 20.49%. Lower rates apply only to borrowers with excellent credit. Approval depends mainly on your credit score and income, not property equity. Because repayment terms are short, the monthly repayments on a personal loan tend to be much higher per dollar borrowed. Personal loans often have upfront fees (e.g. $150–$250 application fee) but little or no ongoing fees. They usually allow quick funding: for example, NAB advertises funds available within one business day if approved online.
Importantly, APRA’s newly refined statistics illustrate how broad the “personal loan” category is. It now includes any loan not for a dwelling, so even a mortgage for a boat or holiday home is logged as a personal loan. In practice, a personal loan can be secured against another asset (car, term deposit, etc.) or unsecured; if unsecured, the bank will charge a higher interest rate.
Table 1. Home Loan Vs Personal Loan
Aspect | Home Loan (Mortgage) | Personal Loan |
Security | Secured by property (mortgage) | Usually unsecured (or secured by other asset) |
Purpose | Buying/refinancing a home or investment property | Personal expenses (car, holidays, renovations, consolidation) |
Loan Amount | Large (e.g. 80–95% of property value) | Smaller (typically $5k–$100k) |
Interest Rates | Lower (currently ~5–7% p.a.) | Higher (typically ~8–20% p.a.) |
Term | Long (15–30 years) | Short (1–7 years) |
Repayments | Monthly P&I or interest-only | Monthly fixed (often auto-deducted) |
Fees & Costs | May include application fee, valuation fee, LMI if <20% deposit | Application fee ($150–$250), no LMI but possibly early-repayment fee (though many waive it) |
Approval | Requires deposit/equity, valuation, proof of income; must comply with LVR/DTI limits | Based on credit score and income only; no property needed |
Government Schemes | Eligible for FHOG stamp-duty concessions, First Home Guarantee etc. | Not eligible for home buyer incentives |
Security Risk | If default, house can be repossessed | If unsecured, default harms credit; if secured (e.g. car), that asset is at risk |
Use Cases: When People Choose Each Loan
When a Personal Loan Makes Sense
Personal loans shine for short-term, non-property expenses. Typical use-cases include:
- Home improvements or small renovations. If you want to do a quick kitchen or bathroom update, buy furniture, or finance smaller DIY projects, a personal loan can be suitable. For example, NAB explicitly markets personal loans for “kitchen and bathroom improvements, builders’ costs, furnishings, DIY and energy-efficiency purchases”. These amounts are usually relatively modest ($10k–$50k) and can be repaid in a few years. Because no security is required, you can borrow quickly.
- Short-term cash needs. A personal loan can act as a bridge when you need cash fast (e.g. urgent car repairs or a gap between selling an old home and buying a new one). Unlike a mortgage or bridging loan, personal loans have minimal paperwork for small amounts. However, note that many lenders do not allow personal loans to replace deposit funds (see Risks below).
- Debt consolidation. Sometimes borrowers roll high-interest debts (credit cards, short-term finance) into a single personal loan with a fixed lower rate. While it is better to consolidate debt into a home loan, personal loans are also used to tidy up debts. If you prefer not to disturb your mortgage or lack equity, a personal loan for consolidation might be considered.
- No early-repayment penalties. Some first-home buyers appreciate that personal loans often allow extra repayments or full pay-off without penalty. This flexibility can help you pay the loan faster without incurring fees, which is harder to achieve if you increase your mortgage (you might face new loan charges or reset fees).
When a Home Loan Is the Better Choice
For almost all property-related borrowing, a home loan is more appropriate. Typical scenarios:
- Buying a house. Clearly, if you want to purchase a home, the product is a mortgage. Personal loans cannot be used to buy property, and lenders will require a home loan at settlement. First-home buyers benefit from very low deposit programs (e.g. 5% deposit via the First Home Guarantee) and grants/stamp-duty concessions – but these only apply if you take out a mortgage. Without a home loan, you’d forgo these key benefits.
- Renovating with equity. If you already own property with equity, it’s usually cheaper to tap that equity through your mortgage (via refinancing, redraw or a home equity loan) rather than using an unsecured personal loan. Home loans have far lower rates and often offer features like offset accounts and redraw. For investment property upgrades, mortgage interest is usually tax-deductible, whereas personal loan interest is not.
- Larger sums or long-term finance. A mortgage is the only practical option for borrowing large amounts (e.g. >$100k) or when you need up to 30 years to repay. Home loans can cover virtually any purchase tied to real estate (even building a new home or investment property), with flexible terms. Personal loans simply aren’t structured for that scale or duration.
- Better rates and lower payments. Because mortgages have lower interest rates, they usually give much lower monthly repayments for a given principal. As ANZ and RateCity point out, if you can roll an expense into the mortgage, your rate will be lower and budgeting easier. We’ll illustrate this with an example below. First-home buyers in particular should leverage mortgages whenever possible – they’ll pay far less interest over time than with any personal loan.
Current Interest Rates: Personal Loans vs Home Loans
To illustrate today’s market, the table below compares current advertised ranges (unsecured personal vs owner-occupier home loans) at major Australian banks. All figures are per annum (p.a.) and represent the very lowest (ideal credit) to the highest advertised rates:
Bank (Owner-Occ, Principal & Interest) | Personal Loan Rates (p.a.) | Home Loan Rates (p.a.) |
ANZ | 7.49% – 19.99% | 5.9% (Avg. owner-occupier mortgage) |
Commonwealth Bank | 7.75% – 20.25% | 5.84% (Digi Home Loan, LVR≤60%) |
NAB | 7.49% – 20.49% | 6.19% (Base Variable Rate) |
Westpac | 7.99% – 20.49% | 6.24% (Premier Advantage Package) |
Notes: Rates are current as of May 2025 and are subject to change without further notice.
Can I Use A Personal Loan For A House Deposit?
Most Australian lenders prefer your deposit to come from what they call genuine savings. This typically includes money that you have saved gradually over a period of at least 3 months. Using borrowed funds, like a personal loan, is generally not classified as genuine.
Why Lenders Are Cautious
Lenders assess your overall financial risk when you apply for a mortgage. If your deposit is funded by another loan, it increases your debt-to-income ratio and reduces your borrowing power. More importantly, it suggests that you may not have the financial discipline to save, which could be a red flag to lenders.
In today’s lending environment, especially under stricter regulations enforced by APRA, most banks and lenders are cautious about approving home loans when the deposit has been borrowed.
What Are Your Options?
If you’re struggling to save a full deposit, you might consider:
- Government schemes: The government offers grants and schemes that allow eligible first-home buyers to purchase with as little as a 5% deposit in some cases.
- Using a guarantor: A family member can offer part of their property as security, removing the need for a cash deposit.
Risks Of Using A Personal Loan For Property Expenses
Using an unsecured personal loan for anything related to buying or improving a home carries significant risks:
- High interest and cost. Personal loans cost far more interest. That means you’ll pay a huge premium to borrow any significant sum. For example, borrowing an extra $10k via a personal loan costs $11,281 in total, whereas adding $10k to your mortgage might cost only $803 more per year. The difference grows with the loan amount and term.
- Impact on borrowing power. Any personal loan you take out adds to your debt repayments. When a mortgage lender assesses you, they treat that monthly personal loan payment as a liability, reducing how much you can borrow. In practice, trying to finance your deposit via a personal loan often backfires: lenders want to see genuine savings, not borrowed funds. Even if you manage to get the mortgage, having a new high-rate loan on your profile makes future refinancing or cash-out more expensive.
- Lenders’ view of deposits. Mortgage lenders are very wary of borrowed deposits. If you try it, one of three things may happen: the lender rejects your mortgage application; they approve but exclude that personal loan from your deposit (meaning you effectively have a smaller deposit and owe more, or must pay LMI); or they approve and you get stuck with paying off both loans. None of these is ideal.
- LMI and fees still apply. Ironically, using a personal loan often doesn’t save you on LMI or fees. If the personal loan covers what would have been deposit money, your mortgage’s Loan-to-Value Ratio (LVR) stays high, and you’ll still pay LMI. You’ll just pay it and carry a new loan. Plus, you incur the personal loan’s origination fee on top.
- Risk of default. Juggling a personal loan and a mortgage increases your risk of payment stress. If you run into trouble, you could default on the personal loan or the mortgage. If it’s the mortgage in arrears, you risk foreclosure on the house. The combined interest burden and shorter terms of personal loans make this scenario more likely.
In summary, using a personal loan to fund home-related costs is not ideal and can complicate your finances. You’ll end up paying higher interest, weaker borrowing power, and possibly missing out on grants or higher loan limits
Case Study 1: Home Loan Route
Sarah has saved $50,000 (10% of her target $500,000 home). She secures a mortgage through a broker (like our team at Hunter Galloway) with a 6% rate on a 30-year loan. She also qualifies for the First Home Guarantee, so with her 5% deposit, she avoids paying LMI.
Her monthly repayment on a $475k loan might be around $2,847 (at 6% P&I), and she benefits from an offset account and deductible mortgage interest (if this were an investment property). Over 30 years, she has paid $518k total (principal + interest).
Case Study 2: Personal Loan Deposit
Tom has no savings, but desperately wants the same $500,000 house. He takes a $50,000 personal loan at 12% p.a. over 5 years to cover a 10% deposit. When applying for a mortgage, he reveals this debt. The lender sees his high repayment ($1,116/month just for the personal loan) and either
- (a) rejects his mortgage, or
- (b) approves only up to a smaller loan.
Assuming (b), his mortgage ends up at $450,000 at a similar 6% rate. He must now make two payments: $2,699/month on the mortgage and $1,116/month on the personal loan, for a total of $3,815 per month.
In contrast to Sarah’s $2,847/mo, Tom pays nearly $1,000 extra monthly. Over the first 5 years, Sarah pays about $71,000 in interest; Tom pays $33,000 on the mortgage plus $15,500 on the personal loan to total $48,500. Tom’s monthly cost is higher, and after 5 years, his personal loan is gone, but his mortgage balance is still very high. If any rates increase or he misses payments, his finances would be strained. Crucially, Tom also missed out on the First Home Guarantee savings – since his deposit was borrowed, he didn’t take advantage of the government backing and likely had to pay LMI.
Government Incentives And Schemes For First Homebuyers
First-home buyers in Australia benefit from several incentives – all of which assume you’re taking out a mortgage on the property:
- First Home Owner Grant (FHOG): A one-off grant varies by state, typically $10k–$20k for eligible first-home buyers who build or buy a new home. According to the national scheme, “a one-off grant is payable to first home owners that satisfy all eligibility criteria”. For example, Queensland currently offers $15,000 for new homes, NSW $10,000–$20,000, etc. Check your state’s rules.
- First Home Guarantee (FHBG) – formerly First Home Loan Deposit Scheme: The Commonwealth scheme allows eligible first-home buyers to purchase with a 5% deposit and no LMI. The government guarantees the remaining 15% (up to 95% LVR) of the property value. This is not free money – it’s a guarantee to the lender, but it means you only need $25k to get a $500k house and avoid paying LMI. Importantly, this applies only to a proper home loan on owner-occupied property.
- Family Home Guarantee: Similar to the first home guarantee scheme, but specifically for eligible single parents.
- Stamp Duty Concessions/Exemptions: Many states offer lower or zero stamp duty for first homes under certain values. For instance, Victoria and South Australia have significant concessions. These tax savings come automatically when you show you’re a first homeowner (with a contract and mortgage).
All these schemes are tied to the mortgage process. Personal loans do not count; they won’t help you with grant eligibility or replacing LMI.
Refinancing & Investment Loans: Home Equity vs Personal Loan
If you already own a home and want to borrow more money (for renovations, other investments or debt consolidation), you have two broad paths: increase your mortgage (home equity loan/line of credit or refinance), or take out a personal loan. Here’s how they stack up:
- Home Equity Loans: These borrow against the value of your home (after paying down enough of your mortgage). Equity loans typically have lower interest rates and longer repayment terms than personal loans. For example, a variable-rate home equity loan might be about 7% vs 12% on a personal loan. You can usually borrow up to ~80–95% of the property value (depending on your LVR). Because the loan is secured by your home, rates are lower, and you get more borrowing power. However, taking on a bigger mortgage means your home is collateral.
- Personal Loan: A personal loan might be simpler to set up (especially if you lack equity or want a very short-term loan) and can be secured against something else or unsecured. It might cap out at ~$100k. But the interest is higher and the term is shorter.
A mortgage top-up greatly lowers monthly payments, making large projects affordable, even if total interest rises. A personal loan demands high payments but can be paid off quickly.
FAQs: Common Questions from First-Home Buyers
Can I use a personal loan as a deposit on a house?
No. Mortgage lenders usually expect deposits to be your own savings or acceptable gifts. When assessing your application, most lenders will count a personal loan as extra debt, not real savings. Instead, you should explore true low-deposit home loan options or government guarantees instead of borrowing the deposit.
Is a home equity loan better than a personal loan?
In most cases, yes – if you have equity in your home, using it (via refinance or a dedicated equity loan) is far cheaper. Home equity loans have lower rates and longer terms. On the other hand, personal loans cap out (usually ~$100k) and charge higher interest.
Which loan is cheaper overall: adding to my mortgage or taking a personal loan?
It depends on what you value (monthly payment vs total interest). Generally, increasing your mortgage will lower your required monthly payment significantly, but extend the interest over many years. A personal loan will demand higher monthly payments but finish sooner. The best choice depends on your cash flow needs and how long you want to carry the debt.
What about other products, like Home Equity Line of Credit or Car Loans?
These can be considered too. A Home Equity Line of Credit (often called a redraw or line of credit) is essentially a flexible mortgage feature and shares the home loan’s low rate. A personal car loan or secured loan will usually be cheaper than an unsecured personal loan, but still higher than a mortgage. However, for first-home buyers, these rarely make sense for funding house purchases – you’d get a mortgage or renovation mortgage loan instead.
Next Steps And Getting Your Home Loan
Our team at Hunter Galloway is here to help you buy a home in Australia. Unlike other mortgage brokers who are just one-person operations, we have an entire team of experts dedicated to helping make your home loan journey as simple as possible.
If you want to get started, please give us a call on 1300 088 065 or book a free assessment online to see how we can help.
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