Deposit from loan advice

Baboo_2

Hi,

My partner & I are in a position where we can afford a mortgage but we do not want to save for the rest of our lives just to raise the deposit.

I have considered getting a large long-term loan for the deposit and then placing it in savings for about a year, so that my credit rating can recover enough to apply for a mortgage.

We can easily afford both the loan and the mortgage, as well as our other out-goings.

I was looking for advice from more experience persons as to whether they think the above 'plan' would work & whether mortgage lenders would accept the deposit, considering how I got it. Also, some advice on exactly how long I would need to wait for my credit rating to recover would also be appreciated.

Thanks

_Andy_

No it wouldn't work. For two reasons - 1) you won't find a personal loan provider who will lend for that purpose and 2) no mortgage lender will accept a loan as a source of a deposit.

opinions4u

Time to start making some sacrifices in life and start saving.

DVardysShadow

Baboo wrote: »

I have considered getting a large long-term loan for the deposit and then placing it in savings for about a year, so that my credit rating can recover enough to apply for a mortgage.:)

That is a barmy scheme. Pay 20% on credit to have savings at 3%. ie, you would pay 18% on your 'faux deposite'. If you did not do this crazy thing, you would have a deposit in 5 years anyway for the same monthly outlay.

Baboo wrote: »

... We can easily afford both the loan and the mortgage, as well as our other out-goings.

Then you can afford to save.

Baboo wrote: »

I was looking for advice from more experience persons as to whether they think the above 'plan' would work & whether mortgage lenders would accept the deposit, considering how I got it.

Experience of the misfortunes of others shows that 100% finance to buy property often ends in tears and repos. If you do it and it goes wrong for you, the consequences will be with you for many years. From the last time around in the 90's, the banks waited years for people to get back on their feet and then began to pursue them for the equity they had built up while rebuilding their lives, to have another go. So if it goes wrong, you can expect it to take 20 years before you get straight. But your life will be blighted and you will probably be affected by the consequences quite heavily in retirement.

Buying property is a risk. Which is why you should manage that risk. If it all goes wrong and you come away with nothing, at least it is over. But doing it your way with the faux deposite will mean that the consequences of it going wrong will continue for years. That is a really good reason for having proper savings which you risk rather than a faux deposite.

JSR

Ask potential lenders directly. My mortgage application form (Nottingham BS) had a check box for loan as source of deposit and I've never read anything from them that said it would be unacceptable. Whatever you do don't try to hide it because your solicitor will need a complete record of where the money came from and will be required to report back to the lender if you lied on the application.

I don't see why it should be a big deal, TBH. An unsecured loan makes no difference to the risk your lender is taking so as long as the repayments are factored into their affordability calculation.

opinions4u

JSR wrote: »

I don't see why it should be a big deal, TBH. An unsecured loan makes no difference to the risk your lender is taking so as long as the repayments are factored into their affordability calculation.

While it's a few years ago now, I have seen statistical evidence that shows beyond any doubt that people who save up their own deposit are significantly less likely to fall in to arrears than people who have borrowed for a deposit.

Those who are gifted their deposit from family fall somewhere between the two.

So your assetion on there being no additional risk to lender is totally wrong. It really couldn't be more wrong.

If people have something to lose (e.g. their own deposit) they are far more likely to try to keep it.

DVardysShadow

JSR wrote: »

I don't see why it should be a big deal, TBH. An unsecured loan makes no difference to the risk your lender is taking so as long as the repayments are factored into their affordability calculation.

Actually, an unsecured loan for a deposit means that in the case of a redundancy, there is less money to repay the lender.

Property at 100000, mortgage of 90000 at 5% is £520/month

Loan for faux deposite, 10000 over 4 years at 15% is £250/month

That £250/month will make a huge difference to how much redundancy can be survived and how long it takes to get straight after.

I would say it makes a very real difference to the risk a lender takes.

JSR

Actually, an unsecured loan for a deposit means that in the case of a redundancy, there is less money to repay the lender.

It's no different to having a loan for other purposes. Taking out a mortgage whilst having a personal loan, for, say, a car purchase, is uncontroversial and lenders account for it in their affordability calculations.

I have seen statistic evidence that shows beyond any doubt the people who save up their own deposit are significantly less likely to fall in to arrears than people who have borrowed for a deposit.

I would like to see those statistics and how they controlled for all the other factors? It may be that using loans for deposit is correlated with other risk factors. I don't see how a deposit loan per se is different to any other loan.

DVardysShadow

JSR wrote: »

It's no different to having a loan for other purposes. Taking out a mortgage whilst having a personal loan, for, say, a car purchase, is uncontroversial and lenders account for it in their affordability calculations.

I think you are bamboozled. If someone takes out a loan for a car, but saves for a deposit, they at least have a track record of saving. Also, with a car loan there is at least an asset which goes some way to paying off the loan at any point. Whereas if a loan is taken for the deposit, the only asset is the asset that the bank are securing on in the first place - there is no extra asset to back the loan.

opinions4u

JSR wrote: »

It's no different to having a loan for other purposes. Taking out a mortgage whilst having a personal loan, for, say, a car purchase, is uncontroversial and lenders account for it in their affordability calculations.

And the borrower has the option of selling the car (or other asset purchased with loan) to recover funds to pay the mortgage. Many do this when prioritising their financial commitments at times of stress. If that loan has simply gone in to the property, and sale of property is not an achievable option (e.g. slow market), then falling in to arrears and repossession is clearly more likely.

I would like to see those statistics and how they controlled for all the other factors? It may be that using loans for deposit is correlated with other risk factors. I don't see how a deposit loan per se is different to any other loan.

As I said, they are from many years ago. But they are also part of the reason that most (all?) lenders do not accept deposits where it is evident that this has come from a personal loan.

Suffice to say that the sample was large enough to be more than convinving.

The psychological commitment to a property you have saved for is the main factor behind those numbers. People who can't be arsed saving for a deposit can't be arsed working as hard to keep the house (statistically speaking).

JSR

You're far too focussed on the purpose of the loan rather than the fact of it. Let's say the purpose is to pay off a misspent youth. No assets just debt. It's not accounted for any differently than a car loan by lenders.

In any case, it doesn't matter what we think. Only what lenders think. Check their lending criteria or ask them. If it's unacceptable to all or most of them then they do a good job of hiding it.