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**Warning:** Late repayment can cause you serious money problems. For help moneyhelper.org.uk

Can A Personal Loans Be Used To Buy A House?

Can a personal loan be used to buy a house?

Buying a house with a personal loan is possible, but in reality, it is probably not a workable option. The main reason for this is the sheer cost of homes in the UK. Personal loans are usually lower than the amount required to buy a house outright. They are usually much smaller than the price of a house (though not a small amount of money). Personal loans will often be around £50,000, which is not enough to buy a house in the UK in most cases and areas.

Mortgage providers often extend lower interest rates on mortgages as the amount borrowed is so much, making using a personal loan to buy a house not always a good idea. Because the interest is earned on the outstanding amount, mortgage providers still earn a lot of money even with a lower interest rate. However, with personal loans and personal loan lenders, interest rates are usually higher as the amount lent is lower. To make a workable profit, the loan providers must charge that higher amount of interest. Therefore, borrowing a huge sum of money from a personal loan provider may be unaffordable due to higher interest rates. As a result, you may end up losing your home if you miss too many repayments on your loan, and you must sell the house to settle the debt.

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What is a personal loan?

A personal loan is when an individual borrows money from a lender. The person and the lender enter into an agreement for the amount borrowed to be paid back in a certain amount of time for an agreed rate. That agreed rate is known as the interest rate and is the extra amount that needs to be paid on top of the original loan. It is paid to reimburse the lender for providing the funds in the first instance.

While most loans will work in this way, they can vary hugely in how an individual applies for one. Some loans will need some form of collateral to secure it – like a certain amount in savings or a car, for example – while other loans will simply need a good credit history for the loan to be extended.

Why might I need a loan to buy a house?

Buying a house is a huge decision to make. For most of us, doing so will be the most expensive thing we ever buy, and as a result, we often need outside funding to help us purchase it. And then, we spend a huge portion of our adult life paying back the amount we borrowed.

In the UK, house prices are at historical highs meaning that more and more of us have to take out larger amounts to purchase our dream home. Plus, deposits must be higher to secure the home in the first place. Even with new Government initiatives to allow mortgage lenders to extend credit on 5% deposits, we still must save that 5% which can be hard to do. While house prices have skyrocketed in the last few decades, incomes have not matched that rise. It makes it difficult for even those with good salaries to afford to buy their own home.

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Your questions, answered

How can I use a personal loan to get on the property ladder?

When using a personal loan to buy a house, one option could be to use the personal loan to make up the final amount offered. If you have a large amount of savings already, it could be that you are short of a few thousand pounds to meet your offer amount. You may not want to take the traditional route of securing a mortgage for that final amount, as mortgages tend to come with many terms and conditions that you do not want. Personal loans tend to be a lot quicker, meaning you can make a better offer in the long run. Some loan providers may still, however, want to know what your intentions for the loan are. They may not want to offer you the loan if it is to purchase the final fraction of your home. However, this will not be an issue to some – if you can make the repayment schedule.

Can I use a personal loan as a house deposit?

Instead of using a personal loan to buy the entire house or just the last portion of it while using up the rest of your savings, some people approach personal loan lenders to bolster a deposit amount. Doing so can be beneficial as the final deposit amount you have on your home can help reduce your mortgage payments and the interest rate on the mortgage itself – reducing mortgage payments even further. Additionally, it can help you make a better offer on a home as you can often secure a larger mortgage, too, thanks to the better deposit. It means you can increase what you are willing to buy a house for. The result is you improve your chances of having your offer accepted.

However, mortgage providers will often frown upon this method of purchasing a house. A lender will often ask where your deposit funds come from and, as a result, may not find you a creditworthy applicant if you have had to take out a loan to bolster your deposit amount. The reason is that personal loans also have interest charged on them, meaning you are more in debt. The more debt you are, the less creditworthy you are deemed to be by a mortgage provider. In the main, mortgage providers look more positively on deposits coming from savings or inheritance. In essence, they want the deposit to be non-repayable to other individuals.

What are the risks of using a personal loan as a house deposit?

If you feel like taking out a personal loan for a deposit is your only option, you do need to ask yourself first, are you able to repay both the mortgage and personal loan simultaneously? Because, remember, while you may be reducing your mortgage by taking out a loan to cover the deposit – you still need to pay that deposit back. It is likely to result in having two large debts, so you need to be honest with whether you can afford both debts simultaneously.

If you do decide to go ahead with taking out a personal loan to stump up a deposit on a house, you need to be prepared that the mortgage provider is likely to offer you a lower amount than if your deposit was coming from savings. The reason being is that they will be considering your other outgoings and therefore what you are likely to be able to repay to them. They will not want to extend a loan amount to you, which means you will miss payments, affecting their profitability. Additionally, they probably will not offer you their most competitive rates either – meaning you’ll be given a lower amount to borrow, with a higher interest rate than other mortgages they offer other customers.

What are other ways are there to buy a house?

So, what do you do if you want to buy a house, but you do not think borrowing for the deposit or entire house amount itself is possible? Here are four options to consider:

  1. It may not sound fun, but you may have to adjust what you are looking to buy. You may have to make a compromise or two on what you want in your home so that the average house price of what you are looking at falls. Doing so means that not only do you need a smaller mortgage, but you also need a smaller deposit amount.
  1. You can put off buying a house for a few months. Use that money to save as much as a deposit as you can. Pay off any outstanding debts that you can as well, as this not only improves your credit rating but it will also mean you have more money left over each month that would otherwise have gone on interest rate charges. Remember, a little bit here, and there can really add up. It may mean that you must stop going out to dinner quite so much or that you don’t buy any new clothes for a few months either. It’s not forever. It’s so that you can save up enough of a deposit that you become more creditworthy in the eyes of a mortgage provider. 
  2. You can approach a mortgage provider about extending you a mortgage for a bigger amount of your home. 95% mortgages became unpopular after the credit crisis, but they are slowly returning to the market. If you have a steady income, you could well be a suitable candidate for a building society or bank. Or you could also approach your mortgage provider about taking a mortgage holiday for a few months if you are looking to move. Doing so can help you save up a deposit if you need to for a bigger home that you need. 
  3. Getting a mortgage can be difficult if you have a poor credit history. Try to improve your credit history as best you can. For some, it can be that taking out a personal loan to buy a home does that. This could be because not everyone has an extensive enough credit history to be considered for a mortgage. If you have never had a credit card or direct debit contract set up, mortgage providers may be hesitant to lend to you as they do not know your attitude to repaying debt. You can sometimes be undesirable by having a scant credit history – even if you have never actually had an overdue invoice against your name.

Can bad credit stop me from buying a house?

Having a bad credit history can affect your ability to buy a house as mortgage providers have extremely strict criteria that you need to meet for them to extend you a loan. Given the large sums of money involved, they want to know that you are a good candidate who will repay the mortgage over time.

Improving your credit rating can therefore be extremely helpful when trying to buy a house. In addition to taking out a loan to prove that you can pay back debts, there are other ways that you can help your credit history if you have missed payments in the past. For example:

  1. It is highly recommended to register on the electoral roll if you have not done so already. Doing so gives mortgage providers, and other lenders comfort that you are a stable candidate who can be found if needed. The risk of you absconding away is diminished if you have registered to vote. 
  2. Do not always max out credit cards. Mortgage providers, in particular, frown upon this as it means they see you struggle to use your income as the only form of covering expenses. It is thought that keeping your credit card spending below 25% of your credit limit is what mortgage providers are comfortable with from prospective customers. 
  3. Think about settling any debts or outstanding invoices. If you have several, it could be a good time to consolidate debt by using a loan with a reputable provider such as us at The Money Shop. Plus, what’s great about consolidating debt is that it often lowers your interest payments, making it easier to pay off any loans too. You’ll do it more quickly – thus leaving you with more funds at the end of each month. Those funds can be put into savings for your deposit.

Need more information on personal loans and house buying?

Even if a personal loan cannot be used to buy a home or as a deposit on a home, The Money Shop can help. We can help improve your finances so that you can save for your deposit in the first place. Our broker partner’s panel of lenders provide affordable loans to our customers as they carry out a thorough credit and affordability check on a customer before we extend a loan. By ensuring that loans are affordable, we also guarantee that a customer is never crippled with debt. Instead, it provides them with financial freedom and the ability to become debt-free and become financially better off in the future. The result is that our customers can start saving for a deposit for a home more easily. Plus, by improving their credit rating, they will also be more eligible for more mortgages with better interest rates.

We have a dedicated team of financial experts at The Money Shop to help you pick a particular loan type or loan product that suits your needs most closely. By choosing the right loan for you, you are more able to pay it off and more quickly. So that financial freedom is even closer and your ability to save for a deposit is even more possible too.

We also offer the latest information around the loans we provide and be clear on the implications of taking a personal loan out with us. Lenders will usually give customers access to their own account area so that they can keep an eye on the outstanding amount of their loan. Doing so allows them to know where they always are financially and give them full control of repaying their loan. Most lenders allow customers to pay off their loans early, which means they do not have to pay an unnecessary amount of interest.

So, take a look at our product range of personal loans today, and see how they can help you improve your financial situation so that you can save your deposit for your dream home.

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