Mortgage Clinic: 'Should I take out a loan to boost my deposit?'

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The Independent Online

I'm a first-time buyer with savings of £11,500, but I'd need a much bigger deposit at the moment to get a decent mortgage rate. I'm tempted to take out a personal loan for £9,000, so that I can get a better mortgage deal. Is that a good idea?
FR, Cheltenham

By Sam Dunn

It is a worrying sign of the times when you're prepared to take out an unsecured personal loan, more usually associated with a new car or holiday, to qualify for an even bigger debt – your own home loan. However, the Bank of England reported last week that many others are thinking along the same lines, with a steep rise in the size of unsecured personal loans to £2.5bn, the highest level since 2003.

Capital Economics, a research analyst, suggests that the jump is linked to lenders' recent decision to pull nearly all 100 per cent loan-to-value ratio (LTV) deals on account of their risk.

Melanie Bien, director at broker Savills Private Finance, says there has been anecdotal evidence of buyers seeking unsecured loans to secure a property, but warns against such action. "The risks of taking on even more debt are not to be recommended; if you can, borrow from your parents instead."

Bear in mind that deals on £10,000 personal loans are not cheap. According to Moneyfacts, the top five cut-price loans for those with a robust credit score now start at 6.8 per cent (Tesco Personal Finance), rising to 7.9 per cent with Nationwide.

Now, that works out at roughly £196 a month – a lot of extra cash to find, especially given that you need to be able to afford stamp duty, legal and moving costs on top of the deposit.

But it's not just this extra expense that will affect you, says David Hollingworth at broker London & Country; there's also the damage to your status as a borrower.

"As part of a lender's risk assessment of you, any potential mortgage lender is going to look at your monthly outgoings – and £196 a month is considerable for a first-time buyer." This will count against you, and reduce the size of mortgage you can take out, which defeats the whole purpose.

You do, however, have some options. Both Bradford & Bingley and the Bank of Ireland are still offering 100 per cent LTV mortgages, although your parents would effectively need to be a guarantor to the loan.

Otherwise, Hollingworth advises that the uncertainty in the housing market means that you could carry on saving for several months to build up your deposit. During this time, house prices in your target area may have fallen, "giving you more leverage when you come to buy".

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