Loan for a deposit ?

Adsta · 29 Jul 2009 at 09:04

Hey all,

I was speaking to a co-worker of mine and we started talking about buying a house. Basically he wants to move out with his girlfriend but he doesnt want to rent somewhere as he feels its a waste of money (fair enough).

So I was talking to him about my plans I said well you know I'm saving up for at least 10% of a property I might consider to purchase. I said I reakon might take me maybe 1 or 2 more years before I have a reasonable deposit then I will start looking.

He said to me that he plans to take out a bank loan for about 10k and then use the money he gets from the loan as a deposit on a house.
Having a little think about it. It doesnt seem that bad of an idea. I mean if you can keep the repayments low (I realise you will end up paying more interest) but it seems like quite a good idea if you want to get on the housing market.

My concerns are though; will mortgage lenders still consider you quite a high risk even though you have a reasonable deposit. How does having a loan impact on you aquiring a mortgage.

Anyways thought it would be great to get some other peoples ideas and thoughts on this.

platypus · 29 Jul 2009 at 09:15

Rental prices are down, and the market is so saturated you can negotiate rental terms easily. Why is it a waste of money? Buying a house at present could lose you a lot of money.

Not only would having only a 10% deposit make it hard to get a good mortgage, but having a debt that big will weigh heavily against you.

Rotty · 29 Jul 2009 at 09:22

The loan will show on a credit report and won't look good to the mortgage provider, also the loan will be short term ( compared to mortgage ) and as such total payments of both loans will be high

It may be better to save the deposit over 1 or 2 years, the market is about at the bottom now but I think it will stay flat rather than rise significantly

Raumarik · 29 Jul 2009 at 09:24

Partially agree with Platypus, it's a bit of a daft time to go buying when rental is so cheap, the method your mate is willing to try with a loan + mortgage doesn't make much sense either and he could find himself in some serious bother within a couple of years trying to keep those repayments going.

Personally I'd wait, rent for now and look back into it in spring next year. Then we'll have a clearer picture of the housing market and it gives him and his girl time to put some more money aside for a deposit.

Vonhelmet · 29 Jul 2009 at 09:25

I can't imagine bank lenders being in a tearing hurry to lend money for use as a deposit on a further loan.

me227 · 29 Jul 2009 at 09:26

Sounds like a terrible idea. Also it certainly won't do you any favours when you're looking for a mortgage deal.

Adsta · 29 Jul 2009 at 09:41

Thanks for the responses I thought that would be the case to be honest.

I wasn't 100% sure how having a loan would impact on getting a mortgage. I know a couple of people that have a personal loan and a mortgage. So I thought why can't the same apply in this situation albeit different.

GinG · 29 Jul 2009 at 09:50

Interesting you bring this pointer up. Only yesterday I was having a very heated debate with my MD about this.

He says that the way forward would be to borrow the cash now and go out and buy a house as they are only going to go up (they are starting to around here anyway). His point was that my goal is to save up £15k (10%) by May next year, however if the prices rise then that £15k will then need to be £16k then 17k etc etc. Which would then make something that is achievable, impossible!

There are some absolute bargains to be had at the moment, i.e. a house is up for sale for £150k, needs some work doing (pretty much everything, no central heating!) however the houses next door are worth £225k+), this makes the loan idea really really tempting.

On the other hand, the mortgage will already be enormous at around £800 a month, adding a £230 - £250 a month loan repayment will eat into the life style and also eat into free cash to do the house up.

It is your decision, if you can afford it and there is a house you have seen go for it, then in 5 years when you come to re mortgage just repay the loan and add it onto your mortgage.

I however (well my gf!) has decided to do it the 'cheaper' way and save up for the deposit so when we move into our 1st home we will be 'debt' free.

Edit: As for a loan effecting your application, a friend of mine went and got a mortgage with Natwest, they still went on how much you could afford to pay back rather than income x whatever. So £4k coming in between 2 people, after bills and mortgage & loan there is still a fair amount left to splash.

Adsta · 29 Jul 2009 at 10:07

I mean thats how I was kinda looking at it. If you have 2 incomes into the household having a loan and a mortgage to pay would be quite doable. I would have thought.

If as a couple you can put a bit of money away you could try get some early payments on either your house or try a clear the personal loan quicker.
Or as in your idea GinG re-mortgage and clear your loan off then all you have to do is worry about paying your mortgage which would be the case in the first place.

Makes an interesting topic

But I think as mentioned really gotta keep an eye on prices. In Milton Keynes prices are a bit all over the shop at the moment and they dont seem to be lowering much at the moment. Lots of flats are popping up but are a-massing in great numbers. I feel buying a flat now would be silly. But if you could get a decent house cheap it might be worth the effort of getting a loan and seeing if you could get a mortgage to well get your first step on the ladder.

CliffyG · 29 Jul 2009 at 10:10

If you are after a new house some developers are doing deals where they pay the deposit for you and you pay it back over 10 years. It's done on a % so if they pay 30% for you now in 10 years you pay back 30% of the current value. You are a little limited with mortgage options but if you are after a house sharpish and have no deposit then it could come in quite handy.

Raumarik · 29 Jul 2009 at 10:16

GinG said:
On the other hand, the mortgage will already be enormous at around £800 a month, adding a £230 - £250 a month loan repayment will eat into the life style and also eat into free cash to do the house up.

Where do you get £800 a month from? That might be the case now but it'd be well over a grand once interest rates rise, which they will. I've noticed nobody has pointed that out. Unless you got both the loan and mortgage at a fixed rate (unlikely due to being first time buyers and with a £10K loan for a mortgage) you'd have a lot of extra cost almost straight away.

me227 · 29 Jul 2009 at 10:18

Could you get a mortgage for a bit more than the house is worth? Then once the mortgage comes through just pay off the loan?

The Mad Rapper · 29 Jul 2009 at 10:22

Rotty said:
The loan will show on a credit report and won't look good to the mortgage provider, also the loan will be short term ( compared to mortgage ) and as such total payments of both loans will be high

It may be better to save the deposit over 1 or 2 years, the market is about at the bottom now but I think it will stay flat rather than rise significantly

^ This.

nIckEl101 · 29 Jul 2009 at 10:24

we had about half our deposit and borrowed the rest, we then rolled that into the mortgage when we changed the terms (were with Rock b4)

Bleek · 29 Jul 2009 at 10:29

GinG said:
He says that the way forward would be to borrow the cash now and go out and buy a house as they are only going to go up (they are starting to around here anyway).

Don't let that fool you.

There are some absolute bargains to be had at the moment, i.e. a house is up for sale for £150k, needs some work doing (pretty much everything, no central heating!) however the houses next door are worth £225k+), this makes the loan idea really really tempting.

How many have actually sold and for that price though?

scorza · 29 Jul 2009 at 10:31

me227 said:
Could you get a mortgage for a bit more than the house is worth? Then once the mortgage comes through just pay off the loan?

Not anymore. When you get a mortgage the lender will arrange a valuation report on the property you're buying, which obviously affects your LTV ratio and whether you can get a mortgage or not. At the moment surveyors are being very pessimistic about home values, whereas in the past they might have turned a blind eye to over valuations.

me227 · 29 Jul 2009 at 10:33

scorza said:
Not anymore. When you get a mortgage the lender will arrange a valuation report on the property you're buying, which obviously affects your LTV ratio and whether you can get a mortgage or not. At the moment surveyors are being very pessimistic about home values, whereas in the past they might have turned a blind eye to over valuations.

Could you lie and say you want a bit extra for renovations? Then just live in a dump of a house for a bit longer.

Scam · 29 Jul 2009 at 10:38

What a ridiculous idea. Why are people still insistent on spending money they dont have? Renting admittedly is not a good long-term prospect, but how can someone say that is a waste of money when comparing it to taking out a loan with interest (and dont forget, a mortgage).

scorza · 29 Jul 2009 at 10:38

me227 said:
Could you lie and say you want a bit extra for renovations? Then just live in a dump of a house for a bit longer.

You could, but you've still got the same problem, and that is that the mortgage companies simply don't want to lend to you unless you've got at least a 25% deposit, and preferably a 40% deposit.

GinG · 29 Jul 2009 at 10:51

Kami said:
Where do you get £800 a month from? That might be the case now but it'd be well over a grand once interest rates rise, which they will. I've noticed nobody has pointed that out. Unless you got both the loan and mortgage at a fixed rate (unlikely due to being first time buyers and with a £10K loan for a mortgage) you'd have a lot of extra cost almost straight away.

Well the cost now hasn't changed much since I was looking last year. As its only a 10% they still only offer between 5 - 7% fixed for 5 years.