Paying a house deposit using a credit card

• It is possible to use a credit card to pay a house deposit.
• Find out if it’s possible for you, and what the risks are.
• Alternative ways to fund your house deposit.

In a booming housing market it can seem crucial to get a foot on the bottom rung of the property ladder at all costs, before even the most modest home is out of reach. Under these conditions, it can be tempting to reach for anything that offers hope of getting together a big enough deposit – even a credit card.

So, can you use your credit card to pay for a house deposit?

The answer is, technically yes. If your real estate or conveyancer has a card facility to accept the payment then it can be done. For the privilege they will almost certainly make you pay the 0.5%-1.5% credit card surcharge on top of your deposit amount.

Can you do it in your circumstances? And would you want to? Is it for cashflow or the rewards points? That's up for you to decide.

Would it work for you?

Australia’s median house price in March 2021 was $899,509, according to the Domain quarterly house price report. The minimum deposit required by most lenders is 5% of the purchase price, although you’ll almost certainly have to pay lenders mortgage insurance if your deposit is less than 20%.

A 5% deposit on a $900,000 house would be $45,000, so you would need an unused credit limit of at least that amount on your card – or cards – in order to draw down enough funds to cover the whole deposit. But in order to qualify for a credit limit of that size you would already have an income high enough to allow you to save for a deposit, and a credit history reflecting your responsible financial behaviour, probably including savings. So you wouldn’t need to use a credit card.

Assuming, then, that you don't have a credit limit big enough to put all of your deposit on a credit card, what happens if you just want to top it up with your credit card to reach an acceptable amount?

You probably can’t ‘purchase’ a deposit

Most house sale contracts require the buyer to pay a 10% deposit into the trust account of the vendor’s agent or solicitor when contracts are exchanged, so you might need to pay $22,500 at this stage. Would this be an opportunity to use your credit card?

The problem with trying to pay all or part of the contract exchange deposit with your card is that the agent or solicitor is unlikely to let you process the transaction as a purchase from them as a merchant. As a merchant, they would have to pay a fee to the credit card issuer of 1-1.5% of the transaction amount, but still pass on your full deposit to the vendor at settlement. This would eat into the revenue they make by acting for the vendor.

So, you’d probably be stuck with taking a credit card cash advance, and using the cash to pay the deposit.

The interest rate is the killer

Many credit cards have an interest rate on purchases of more than 20% p.a., with a cash advance rate that is even higher. Interest charges on cash advances start from the day you take the advance. So, paying a deposit with a cash advance can only really work as a short-term strategy, assuming that your cash shortage is only temporary.

Let’s say you were able to secure a credit card cash advance at one of the lowest interest rates available, 13.99% p.a. with Bendigo Bank. If you paid off the $22,500 deposit in two years it would cost you $25,626 by the time you’d repaid it at $1,068 per month. That’s fairly painful, especially in addition to your new mortgage repayments. If you made only the minimum monthly repayments it would take you 36 years to repay the cost, including interest, of $52,240. Ouch!

Your lender is looking for savings, not credit card debt

You may have received pre-approval – conditional approval – for your home loan, based on your financial situation at the time you applied. The home loan lender will have assessed your credit score as well as your income and savings record, and you may have been advised that you will need lenders mortgage insurance (LMI) because your deposit isn’t large enough for the loan amount you are seeking.

However, taking a credit card cash advance to top up your deposit and avoid LMI at this stage could ruin your chances of proceeding to unconditional approval of your home loan. That’s because you will change your debt-to-credit ratio, and your credit score will almost certainly take a hit as a result of the new debt. You should try to ensure that your financial circumstances don’t change in the period between home loan pre-approval and unconditional final approval.

Some good news – points or cashback potential

There may be an upside to using your credit card to fund the deposit. If you have a rewards points credit card, a frequent flyer points credit card or a cashback credit card you could potentially soften the blow of the interest cost with lots of points or cashback on the thousands of dollars you are spending.

Ways to pay your deposit without using a credit card

The obvious alternative way to fund your house deposit is via savings, a method which will earn brownie points from a potential lender. But if you can’t manage it entirely from savings, you do have other options, including:

• Home loan guarantor. Your parents may be willing to act as loan guarantors if they have substantial equity in their own home.
• Gifted deposit from a family member.
• First home buyer grants and concessions from state and territory governments.
• First Home Loan Deposit Scheme (FHLDS), a federal government initiative to guarantee home loans for first-time buyers with low deposits.