Should I get a Loan to Pay for a House Deposit?

Many people find that a big obstacle for them to owning their own home is saving up for the deposit. This can take a lot of time and if you have to pay rent, it can be difficult to have enough money left over to save towards a deposit as well. Those still living with their parents have some advantage as it is likely that their expenses will be lower and they will therefore have more money left over to save.

It can sometimes seem like as soon as you have enough money put together for a deposit on a home, the house prices go up and so that amount is not enough. If this is the case then it means that you will need to find a way to save money at a faster rate and this is not always easy. Sometimes it can therefore be worth considering whether you should get a loan to raise the capital for the deposit.

Getting a loan is not a decision to be taken lightly, especially if you are then planning on getting a mortgage as well. You will need to think hard about whether you will be able to afford the repayments on both of them. The loan repayments are likely to be small compared to the mortgage, but you will also need to consider the fact that you will need life insurance and house insurance with the mortgage and so the cost will be higher than just the cost of the repayments. You will need to make sure that you can cope with paying all of the bills, including any others that may be extra because you are now living in your own home. Also consider what might happen if the interest rates went up. This would be likely to cause an increase in the cost of both the loan and the mortgage, assuming they were both on a variable rate. This could mean that you suddenly have a lot more money to pay out each month and it could mean that you will no longer be able to manage. It is very difficult to predict what will happen to interest rates, particularly over such a long term as a mortgage. You may think that in the future you will be earning more and so if interest rates rise, you will be fine or you will have paid off the loan. However, it is always wise to be negative about such things and have a plan as to what to do in case the rates go up. Consider whether you will be able to save some money up to enable you to cope, whether you could find another way of generating some income or reducing your costs. It can be hard to think about the future as you do not know what situation you will be in, what job you will be doing if you will have a family to support etc but it is good to try to be as prepared as you can for any eventuality.

Another problem with taking out a loan is that when you apply for a mortgage the lender will want to know where you got the deposit form. They will also look at your bank statement to see whether you can afford to make the monthly repayments. If they feel that you cannot save enough money to raise the money for a deposit yourself they may decide not to lend you the mortgage money as they may feel you have not demonstrated that you are good with money. They may also see the loan repayments going out each month and feel that you will not be able to manage the mortgage repayments on top of those and decide not to let you have the mortgage.

It is therefore quite a risky decision to make. Not only are your risking the possibility that you may not be able to manage the repayments on both a loan and a mortgage, especially if rates go up you are also risking the fact that you may not get a mortgage at all. It can be a very difficult situation as you may be prepared to take the risk of getting a loan so that you can at least try to get a mortgage but it may backfire on you. It could be wise to seek financial advice on this or at least to ask around and see if anyone else has had success trying it. If there is any other way that you can save up more money, perhaps by cutting back more or increasing your income, this could be a better way to go. It may take longer this way, but it is not so risky and will be more likely to be approved of by your mortgage lenders.

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