Taking Out a Loan to Pay for a House Deposit

totallynaive

Hi,

I'm just wondering if this is a good idea or not. I'm clueless really when it comes to things like this and want to know if there's anything vital I have missed that could bite me later on.

My girlfriend and I currently rent at £400/month. We want to get on the famous property ladder as we don't particularly like where we are living for a number of reasons, not in the least the fact that our money is doing nothing to secure our future.

We have spotted a number of houses locally around the £70k mark that we like the look of, but can't currently afford a £7k deposit. I earn £15k a year and my girlfriend earns £12k. It would take us quite some time to save up what we need, and we wouldn't have anything left over should we need it at the time.

HSBC are currently offering 6.2% APR on loans until the end of the month and we are wondering taking out a £7k loan over the course of 5 years would be a good idea in order to pay for a deposit. I tried lowering the number of months over which to pay, but HSBC refused due to my disposable income. I would have to get the loan myself as my girlfriend doesn't qualify. For what it's worth, we both have credit cards with a combined figure of around £3.5k to pay off, currently in interest free periods (although this will end after March).

Is something like this a good idea? What are the potential issues? The HSBC website says the total amount payable on £7k would be £8,126. That doesn't seem too bad over 5 years or have I missed something crucially important? Please forgive my naivety here, any advice would be much appreciated.

Thanks

johnboyinsole

Hi,

I'm not a huge expert but it doesn't sound to me like you are in a financially good position to take out a mortgage and neither does the bank from the sounds of it. Talking through my experience of mortgage applying, they almost always ask you where you got the funds from for your deposit. Saying it is from a loan is already putting you in a bad position and to make it worse, they'll also deduct the amount from any potential mortgage borrowings too. Add in the credit card debts and other outgoings banks are interested in now, then I think you'd probably find it hard to get the mortgage. Perhaps approach a mortgage advisor to give you some advice but sounds like you'll have to do what I did and that's just save and save and save until you can afford to go for it.

ACG

You cant use a loan to fund the deposit of a property....otherwise lenders would just give you a 100% mortgage.

Lenders can ask for 3 months bank statements and will do a credit check.
They will see you owe £7k, also the repayments for that loan will be taken from your affordability.

It wont work.

Thrugelmir

Don't overstretch yourselves. Tackle one issue at a time. Firstly by weaning yourselves off credit cards. Saving a deposit does take time. But well worth the effort in the long term.

poppy10_2

You can't take out a loan to fund a deposit. Or rather, you can, but you would have to declare the source of the funds, which would immediately be disqualified as a deposit by any mortgage lender. Save up, you can't afford to buy at present.

opinions4u

totallynaive wrote: »

My girlfriend and I currently rent at £400/month. We want to get on the famous property ladder as we don't particularly like where we are living for a number of reasons, not in the least the fact that our money is doing nothing to secure our future.

Buying a property that doesn't increase in value will do more damage to "securing your future" than the flexibility of renting.

Don't assume property ownership is some sort of financial utopia. It's desirable to many, but it comes with significant financial responsibilities and risks that shouldn't be taken lightly.

We have spotted a number of houses locally around the £70k mark that we like the look of, but can't currently afford a £7k deposit.

Don't forget legal fees, product fees, survey fees, getting connected to a phone service and numerous other costs that come with buying property. You need more than the deposit.

I earn £15k a year and my girlfriend earns £12k. It would take us quite some time to save up what we need, and we wouldn't have anything left over should we need it at the time.

Well you would have something left over if you saved for a bit longer. Property prices aren't going anywhere, so I'd strongly suggest saving for longer and getting a good financial base behind you. Deposit + fees + 3 months net pay as contingency money should a crisis happen (like losing a job).

HSBC are currently offering 6.2% APR on loans until the end of the month and we are wondering taking out a £7k loan over the course of 5 years would be a good idea in order to pay for a deposit.

It's a horrible idea.

1) When asked where your deposit has come from, you will give the honest answer (as to do otherwise is fraud) and almost certainly be delcined for a mortgage.

2) If a miracle happens and you are accepted, lenders will significantly reduce the amount they will lend.

3) It's a big chunk of your incomes. If you can't afford to save deposit, can you really afford the responsibilities of home ownership and a big credit commitment?

4) I bet they wouldn't lend you the money at 6.2% anyway.

For what it's worth, we both have credit cards with a combined figure of around £3.5k to pay off, currently in interest free periods (although this will end after March).

So how did these debts build up? Are they reducing? If not, you're already living beyond your means. Minimum payments will jump when interest kicks in too. So your financial position is about to worsen.

You want to take on a mortgage. That's a massive commitment and comes with responsibility. You need to get in to a mindset of getting rid of debts, saving up for the nice things in life and not relying on credit to see you through.

You seem to be some way off this at the moment.

Clear the cards. Be comepletely debt free. Build up the deposit and contingency fund. Then buy the house.

_Andy_

No lender will accept a loan as a deposit source, plus you probably won't find a loan provider to lend for that purpose anyway

DannyboyMidlands

You just need to knuckle down and save that deposit I'm afraid. Me and my other half lived frugally for 3 or 4 years to scrape one together (plus an emergency fund).

Sort out your budget, pay off your debts and stop looking for short cuts.

totallynaive

Thanks for the advice. I knew there must be a catch somewhere.

RenovationMan

I suggest you go onto the DFW board, not only to sort out your credit cards and to get tips on living within your means but also to see what can go wrong when you overstretch yourself financially (you might also want to lurk on the bankruptcy board). I'm a great believer in learning from other people's mistakes.

My advice, such as it is, would be to pay off your credit cards, reduce your outgoings, up your income and save like mad for a deposit, your moving costs and an emergency fund of at least 3 month's worth of cash.

totallynaive

RenovationMan wrote: »

I suggest you go onto the DFW board, not only to sort out your credit cards and to get tips on living within your means but also to see what can go wrong when you overstretch yourself financially (you might also want to lurk on the bankruptcy board). I'm a great believer in learning from other people's mistakes.

My advice, such as it is, would be to pay off your credit cards, reduce your outgoings, up your income and save like mad for a deposit, your moving costs and an emergency fund of at least 3 month's worth of cash.

I'll take a look, thanks. Ironically, having never borrowed before we took out these credit cards to build up our credit score. The plan being to use them as much as possible, then pay them off before the end of the interest free period. I imagine we'll run a bit over now, but not horrendously so. Then as we grew more and more contempt for this crappy little house we rent, the loan popped up and we started to wonder if it might be a ticket into our own place.

We're going to focus on paying off the credit cards now and work out what needs to be done to reduce our outgoings.