Loan for a deposit on house?

hilton2006

Hi everyone,

I know this is going to be controversial but basically my question is: Should I take out a small loan so I can get a 5% deposit on a house?

Me and my partner are looking to buy a house around Feb next year. We have no debt but also no significant savings (we actually did have enough for a deposit at one point but had to use the money for personal/family reasons). What we have and what we will save before then we be swallowed up almost completely by the costs of moving leaving nothing for a deposit.

I know I could wait a few years to save enough for a deposit but to be honest we can’t take much more of renting!

So, our options are either we go 100% or 95% with the 5% raised through a loan (or credit cards). We both have good credit ratings (never missed a payment and have been reasonably active credit users). We are also good with money - we always look for the best products and record every penny we spend on Microsoft money (I could tell you what I brought on this day in 2003! )

We are looking to buy a house for about £125K. This is how I see it:

· 95% mortgage would give us more choice.
· At 7% interest it would cost about £805 a month
· A loan over 3 years for £6250 would be about £190 a month

· 100% mortgage would give less choice.
· At 7% would cost about £895 a month.

Like I say, we are definitely going to do it next year so surely having a 5% loan would work out cheaper in the long run as we would be paying off 5% of the mortgage over 3 years and not 25?

I know everyone says credit to fund credit is bad (and I usually agree) but is it always?

Opinions are welcome! Thanks! :beer:

poppy10_2

hilton2006 wrote: »

We are also good with money

Doesn't sound like it?

I know everyone says credit to fund credit is bad (and I usually agree) but is it always?

Yes

ahsanjalil

I am in to same situation, it really depends on individual circumstances.

I have already borrowed £15K unsecured for 5% deposit plus to getting rid of my credit cards, as I am on good salary I can afford loan installments and mortgage together. And I am very hopeful that in couple of years I will repay my loan from my property investment.:cool:

I have got mortgage already, but it was easy for me as I am already paying £550 rent and £230/month my loan.

BTW your interest rate seems too high, is that assumption or real?

hilton2006

poppy - could you please try to justify your comments?

Jonbvn

There are many indicators pointing to a down turn in house prices. This may or may not occur - I can't see the future. However, it is likely house prices will not increase in most areas in the short-term.

In consideration of the above, at present the most prudent thing for you to do, would seem to be to try and save a decent deposit, then consider buying say in a year or two. Hopefully, by then house prices may have dropped or remained stagnant. This means you may get a cheaper house and a lower mortgage rate.

Of course, if you find renting that terrible....

hilton2006

ahsanjalil wrote: »

I am in to same situation, it really depends on individual circumstances.

I have already borrowed £15K unsecured for 5% deposit plus to getting rid of my credit cards, as I am on good salary I can afford loan installments and mortgage together. And I am very hopeful that in couple of years I will repay my loan from my property investment.:cool:

I have got mortgage already, but it was easy for me as I am already paying £550 rent and £230/month my loan.

BTW your interest rate seems too high, is that assumption or real?

We know we could pay the debt off in 3 years without any problems. The way I see it, if we put this debt onto 0% credit cards it would be much better than just adding it to the mortgage?

The rate was just a guess at the top end of current rates - I know the actual rate would be less (if we have a deposit!).

Like I said before we ARE good with our money. I have never paid interest on any credit card or loan ever, I always look for the best value products and we have an income which will mean this level of mortgage will be easy to afford. If we were irresponsible we could get a much bigger house for about £60K more but we don’t want to do this as we have no desire to live ‘on-the-edge’. We can save now but not as much as I would like as our rent is quite high.

We had the savings but like I say had to use them for costs which I am not going to go into – but they were important and neccesery.

hilton2006

Jonbvn wrote: »

There are many indicators pointing to a down turn in house prices. This may or may not occur - I can't see the future. However, it is likely house prices will not increase in most areas in the short-term.

In consideration of the above, at present the most prudent thing for you to do, would seem to be to try and save a decent deposit, then consider buying say in a year or two. Hopefully, by then house prices may have dropped or remained stagnant. This means you may get a cheaper house and a lower mortgage rate.

Of course, if you find renting that terrible....

Point taken but if I just take that deposit now from credit (cheap or 0%) and pay it off within 3 years max I don’t see how from a financial point of view it makes a difference.

Obviously if I was the sort of person to not pay it off that would be another case.

firsttimetom

Point taken but if I just take that deposit now from credit (cheap or 0%) and pay it off within 3 years max I don’t see how from a financial point of view it makes a difference.

It may not. But you've already used up your savings for family reasons. What happens if something happens again and you can't meet the payments (redundancy or worse, illness for example). Miss a few payments and the interest and late charges soon mount up.

People who took out cheap mortgages and are now suffering due to the interest rate rise have found out the hard way to budget for the unexpected and that no one can predict the future.

How much can you save between now and feb? House prices are pretty stagnant and won't do much (i.e rise) between now and then. It's traditionally slow this time of year anyway.

hilton2006

firsttimetom wrote: »

It may not. But you've already used up your savings for family reasons. What happens if something happens again and you can't meet the payments (redundancy or worse, illness for example). Miss a few payments and the interest and late charges soon mount up.

People who took out cheap mortgages and are now suffering due to the interest rate rise have found out the hard way to budget for the unexpected and that no one can predict the future.

How much can you save between now and feb? House prices are pretty stagnant and won't do much (i.e rise) between now and then. It's traditionally slow this time of year anyway.

I agree that having savings is important but even with this mortgage and loan we will still be able to save a small amount (about £100 a month). If we cut back on spending (which we should do really!) we could save more but to be honest I am not sure we will. Although we are the sort of people who if it came to it would rather cut back on everything then miss a payment. We would always pay everything at the start of the month even if we did not have enough – this is how we have always been.

It is mainly for that reason that I am thinking of doing it this way. We have a perfect record for paying bills but we have never (to be honest!) saved as much as we could do. I would be far more likely to pay £200 a month off a loan than save £200 a month for a deposit. I would like to change this but the reality is we all know it is easy to justify to ourselves that we need 'something' rather then putting the money away.

I hope people can understand what I am mean by this and don’t just think I am a money waster?

What it comes down to is: we are definitely going to buy next year. We will have more than enough money for costs but won’t have money for a significant deposit. Should we go 100% or 95% plus a unsecured credit (cards or loan if we can get a good deal)?

Thanks again! :T

carolt

Why not just set up a direct debit into a savings account you can't touch easily eg one with a 1 or 2 month notice period, or even open a building society account in a faraway location you can't get to easily (!), and put the spare £2-300/month into it or more if you can. That way, you'll be saving for a deposit. It may that by Feb you'll have changed your minds on buying immediately being the best thing to do - if prices have started falling significantly - or you may not be able to find the perfect property straight away anyway. That way you're not tied into anything AND you'll have a nice nest egg to start with. Try and have a cheap xmas and get people to give you/give each other cash towards the house eg. you could 'give' each other a new kitchen or something....

Better than borrowing. Also, I was under the impression that existing debts were taken into account when calculating what you can borrow for mortgage purposes - wouldn't you have to declare this anyway, thus reducing the amount you can borrow?......

pamaris

Another reason to save versus take out a loan for the deposit, is that when you apply to get your mortgage, your debt will be taken into account and in a tightened lending environment you may be penalized for this. It might not be that easy to get a mortgage for the scenario you describe in the
coming months/ year/ years.

ETA: Ah, carolt just mentioned this.