Are you thinking about buying a home? Will you require a personal loan to help you? In this article, with Personal Loans Now, we look at whether first-time buyers should boost the size of their home deposit by taking out a personal loan.
- Affordability checks for mortgages
- Whether a bank will accept a loan as deposit money
- Loan applications & your credit score
- Other expenses of buying a home
- Whether a mortgage and a loan represent too much debt
- Do the maths
Saving up for a deposit for your first home can be a daunting prospect. One of the questions which people often ask is whether they should take out a loan to increase their deposit. By doing so, they’ll be able to access cheaper interest rates on their mortgage. However, is this really such a good idea as it seems?
Mortgage Affordability Check
Since the Mortgage Market Review (MMR) of April 2014, banks and other mortgage providers are much stricter about their lending criteria for awarding mortgages. They take into account your income, your spending habits and any financial commitments you already have.
Financial institutions also have to apply a ‘stress test’ to see if you’d be able to weather any increases in the mortgage rate. The financial institutions judge this as 3% greater than the bank’s SVR (Standard Variable Rate), this can be as high as 8%. With a mortgage and a cheap personal loan UK, would you be able to pass the test?
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Having to fork out monthly repayments on a personal loan also effectively reduces how much money you’ll have left to pay a mortgage. If the personal loan reduces the amount the bank is willing to lend you, it defeats the whole purpose of getting a loan.
Will the Bank Accept a Personal Loan as Deposit Money?
Another issue is whether the mortgage provider would accept borrowed money as part of the deposit. Many expect you to sign a declaration that the deposit money came from a non-repayable source. In other words, that it was from your own savings or was a gift from your parents, for example.
Signing this declaration when you have taken out a personal loan is characterised as mortgage fraud.
Some banks might be prepared to accept borrowed money for the deposit but only if you borrowed the money from another financial institution. Why the distinction? The reason is that an unsecured loan without a guarantor, unlike a mortgage, is unsecured. Imagine you face some financial difficulties. Which one would you pay off first? The mortgage or the loan? Being faced with the prospect of losing their home, people would naturally choose the mortgage. Lending money for a home deposit is therefore considered too risky for most lenders. You could, of course, declare that the loan is for another purpose such as a holiday but once again, this fraud.
Loan Applications & Your Credit Score
A single credit application won’t necessarily raise a red flag for your mortgage provider when you apply for a mortgage. However, if you apply for loans from different lenders in a short period of time and are turned down, this will adversely affect your credit score. In fact, it could even result in your not being awarded a mortgage. They will begin to wonder if there’s something wrong with your management of your personal finances.
Other Expenses of buying a Home
You should also bear in mind that the deposit isn’t the only expense you have when buying a home. You should ask yourself whether you’d have sufficient money to cover the surveyor’s costs, bank and legal fees, removal costs, etc. Also, don’t forget that once the house is yours, won’t you want to put your individual ‘stamp’ on it by doing it up, redecorating and so on. Wouldn’t you struggle with finding the cash once you’ve paid both your mortgage and loan repayments? You probably won’t want to go for best home improvement loans UK once you have finally finished paying up your other loans.
A Mortgage & A Personal Loan
Now that we’ve seen the issue from the point of view of the financial institutions, let’s consider it from a personal viewpoint. Let’s imagine that you received both a loan and a mortgage.
Taking out an instant and flexible personal loan as well as a mortgage is adding another level of risk to what is already an extremely stressful time. Taking on additional debt in order to qualify for an even larger debt isn’t the ideal way to start your new life as a home-owner. Being worried and stressed about your finances can rob the experience of all its joy.
This worry could have an effect on your life for the entire loan period, which could be as long as 5 years. How will this affect your quality of life? For example, would you have to make so many cut-backs on all the fun things that make life worth living such as going out and holidays?
It could also influence your long-term plans since you might have to delay starting a family or making a career change. Then, you have to think how you would cope if the unthinkable happened and you (or your partner) were unable to work or were made redundant.
Do the Maths
Is it true that you would necessarily save money by taking out a loan to be eligible for a mortgage with a lower rate? Now is the time to sit down with a pen and paper and work it out. Don’t forget that personal loans have much higher interest rates than mortgages.
After weighing up all the difficulties and possible problems, it isn’t a good idea to take out a personal loan to boost your home deposit.
Think about the alternatives. Be patient and build up your savings by drawing up a budget. If you’ve set your heart on buying a home, look at cheaper properties and use a smaller deposit. You can always remortgage when you increase your equity in the property. You could also look at other ways to buy such as shared ownership or the Help to Buy schemes. Finally, you could use other forms of funding such as guarantor loans or offset mortgages. Borrowing to increase your deposit is definitely not the answer.