My partner and I are first-time buyers and have found a property we want to buy for £385,000. We have a deposit of £50,000, which leaves us a few thousand pounds short of a 15pc deposit.
While at the moment we are eligible only for mortgages for 90pc of the property value, but if we could find a little over £7,000 more we could unlock cheaper rates offered by 85pc mortgages.
As our families are unable to lend us anything, we would have to take out a personal loan for the extra money and pay around 5pc-6pc interest on the debt each year.
Is borrowing the extra money via a loan, in order to qualify for a mortgage in a different tier, a good idea? And, as the loan would have to be taken out first, would this affect a lender’s view of our affordability, as it would see the loan repayments as another expense?
If we were rejected for a loan it would show up on our credit files. Could this further hamper our chances of getting a mortgage?
The quick answer to whether you should take out a personal loan to form part of your deposit is no.
While first-time buyers should try to save as large a deposit as possible, especially if it takes them from a 90pc mortgage to an 85pc loan and therefore a lower interest rate, taking out a personal loan wouldn’t be practical in this instance.
There are two reasons for this. Firstly, the majority of lenders will accept deposit money only from a buyer’s savings or from a gift from a family member, so taking out a personal loan to form part of your deposit will not be accepted by most lenders.
HSBC and Santander may accept a personal loan as part of a deposit as long as the loan is not with them.
Secondly, the monthly payment on the loan will be taken into account for mortgage affordability purposes and will reduce how much a buyer can borrow, said Daniel Bailey, a mortgage broker at Middleton Finance.
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Since 2014, property buyers have faced stringent rules on how much money they can borrow, based on their ability to repay a mortgage.
All buyers must undergo strict affordability checks that assess the monthly mortgage repayments a borrower could afford, taking into account their various personal expenses and their income.