For first time home buyers, their first issue is coming up with enough money to cover the home deposit of the property. Often, they consider borrowing from friends and family or taking bank loans.
However, for deposits, taking a loan from a bank in addition to taking loans to cater for the mortgage may not be a wise option. This is very risky and will add a lot of strain to your financial status.
In this article, some essentials to raise money to cater for the deposits and alternatives to borrowing are elaborated.
Raising the deposit
The mortgage market today requires you to pay between 5-10% of the cost of the property as a deposit to qualify for the mortgage.
In the past, 100% mortgage payments were also available. However, today it is rarely applied due to the high risks of negative equity it involves. People are instead looking out for mortgages that require low deposits.
Future home buyers are looking out for mortgages that require low deposits as the high renting, costs of living and stagnant wages make it difficult to raise the money. Loans, on the other hand, are considered a dangerous strategy.
The detriments of taking a loan
To get approval for a mortgage a few people take up a personal loan. Lenders frown on this move as they consider it as evidence that you are not qualified for the mortgage at all as they are applying for an even larger debt in future.
Lenders will always request for a declaration that illustrates the source of your funds for the deposit. They also stipulate that the funds should be from a source that you will not need to repay in future example savings or funds given out as a gift from a family member.
Borrowers should always evaluate whether they will be able to pay off both the loan and mortgage before they take out any loans. “Lenders will often reject a deposit if they realize that the buyer has a loan to pay in addition to the mortgage,” exclaims mortgage expert, Stefanie Bryant, from depositfinancing.ca.
The lenders will also check your borrowing history. Thus, they will review your credit files. It is important to present the lender with honest information on any loans you took previously.
Additionally, the lenders will also review your spending habits. This was made possible by the Mortgage Market Review (MMR) which started on 26 April 2014 that allows lenders to review bank statements thoroughly.
Although this does not mean your spending habits will be judged harshly, the lenders need to be assured that you can afford the monthly mortgage amounts and still have disposable income left over to pay off your other expenses.
Lenders who accept a loan as a deposit are likely to reduce the amount they lend out which reduces the significance of the process.The low amount received will keep you from accessing the competitive mortgage rates.
The review ensures that potential buyers have to think critically about their decision before they take out any rental deposit loans.
The high scrutiny on the spending habits of potential home buyers has highly reduced the likelihood of buyers receiving a mortgage deposit loan if they have a borrowed deposit.
People with loans have a high financial liability which reduces their ability to pay off future debts. This makes lenders wary of their prospects of paying off or affording the mortgage.
Before borrowers take out any loans, they should assess their ability to pay off the mortgage and deposit loans at the same time within the specified period considering the rates are likely to be very high.
Use Credit Cards
Credit cards can not be used directly to pay the mortgage. However, you can use your credit card often to pay your expenses thus save your disposable income.
The negative side of this method is that the lender will monitor your credit card use and the high amount of spending may limit the amount the lender offers for borrowing.
Monetary gifts from the family
Lenders will often accept deposits if they are a gift from a family member and a document has been signed to confirm that the receiver is not obligated to repay the amount.
Some potential homeowners have thus had to be dependent on their parent’s account. However, this changes in future after they receive the mortgage and can repay it in the future. They can also gift back the money they received. Although this is not ideal, it is a way of getting the services needed.
It is also important to note that some lenders may limit the people who are viable to offer the gift deposit. Often, siblings, parents and grandparents gift deposits are accepted, but those from family friends and great aunts and uncles are unaccepted.
Guarantors are also an option to use to receive the mortgage amount you need if your savings do not do the trick.
To use a guarantor, a high level of trust is required between the parties as they will be financially tied to each other.Any mistake by one of the parties could affect both of their credit ratings.
Getting a home info-graphic
The above means that the guarantor’s house will have a charge that in case the borrower defaults making the mortgage payment, then the guarantor is held responsible.
Offset mortgages through family savings
Parents can offset the interest their children will have to pay for taking a mortgage. This is achieved through using their savings to offset the interest often known as an offset mortgage. Although the parents can access their money, they won’t get any interest from it.
The government started the shared ownership schemes to help the first time home buyers purchase their homes. The strategy involves the buyers purchasing between 25-75% of the home, and the rest of the share is paid as rent.
To purchase a property through the shared ownership strategy, the household needs to earn $60,000 or below, the buyer should be a first timer and should currently be living in a rented housing association property or that of the council.