The pain of being a borrower

THE image of aspiring homeowners scrimping together enough cash for the deposit on a flat is not as common as it once was, as these days impatient buyers will borrow it with a personal loan.

But while this can shave years off time wasted spending money on rent, many of these borrowers are setting a trap for themselves which could take even longer to escape from.

Nearly half of all prospective firsttime buyers plan to borrow their mortgage deposit, according to research by the Association of Investment Trust Companies (AITC, 0800 085 85 20). London-based independent financial adviser Charcol (www.charcolonline.

co.uk) concurs, adding that the practice is very common in the capital.

AITC's research has added to worries that the housing market is overheating, with borrowers overstretching themselves. And as the Evening Standard recently revealed, lenders are increasingly refusing to grant large percentage mortgages on properties in a variety of London's "hotspot" postcodes.

Now, mortgage lenders are looking askance at the practice of borrowing a deposit. Nationwide, the UK's biggest building society, has said it will refuse applications from anyone intending to borrow a deposit, while Skipton Building Society says it does not look favourably on the practice either.

And even if you find an agreeable lender, you then could have the problem of seeing your already squeezed income no longer covering your monthly repayments.

Skipton sales and marketing general manager Steve Aldous says: "We take a poor view of those borrowing their deposit - we don't want people to be overextending their borrowings, particularly if interest rates go up."

For the past five months, the Bank of England has kept rates frozen at four per cent, but many pundits expect a one per cent rise by the end of the year.

According to AITC, first-time buyers borrowing their deposit need to find an additional monthly sum of around pounds 260 if they take a loan over five years to pay the average UK deposit of pounds 13,000.

And if interest rates rise by one per cent, London's typical first- time buyer would have to find around pounds 100 more on top of the deposit loan repayment for their monthly mortgage repayments than they do at the moment.

Say you borrow pounds 171,000 - 95 per cent of the average London property price of pounds 180,000 - and you pay 4.75 per cent on a Yorkshire Building Society (www.yorkshirebuilding society.co.uk) capital-and-interest loan. Your monthly repayments would be pounds 973.93, but a one per cent rise would see this rise to pounds 1,074.66.

Add to that the pounds 9,000 deposit, borrowed over five years with Cahoot at the current market-leading rate of seven per cent APR, and you will need to find an extra pounds 177.30 per month.

Some lenders offer 100 per cent mortgages, thus doing away with the need for a deposit. And even if interest rates rise, borrowing through your mortgage is still the cheapest way and rates are lower than even the most competitive personal loans.

The downside of 100 per cent loans is that some lenders, such as NatWest, charge a mortgage indemnity guarantee (MIG), an insurance policy that allows lenders to claim back any shortfall if you default on your mortgage.

MIG can add around 1.5 per cent on to the cost of your loan.

If you do your research first, though, you will find 100 per cent lenders such as Mortgage Express (www.

mortgageexpress.co.uk) that don't charge MIG.

Having said all that, some banks and building societies continue to refuse to lend at this level on properties in certain parts of the capital.

If you are being discriminated against because of your postcode, consider a group mortgage application before applying for a personal loan.

Combining three or four incomes makes for a stronger application and pooling what cash the group has to make up a deposit means more lenders will be willing to offer you their most competitive deals.

Group mortgage applications can usually get up to four times the highest income plus one times each of the other incomes.

If you don't want to sit back and watch house prices rise as you save for a deposit, why not keep it in the family? Research by AITC shows that 38 per cent of would-be homeowners plan to ask their parents for their deposits.

Doing this might require that you swallow your pride, but this will be easier to take than not being able to meet your multiple loan repayments if rates creep upwards.

Why you should resist borrowing your deposit: Your application could be rejected by high-street lenders.

If interest rates rise by one per cent this year, you will have to find an extra pounds 100 on top of your loan repayments.

There are alternatives, such as 100 per cent mortgages, buying with friends, or borrowing from members of your family.

To buy the average London property you will need to borrow around pounds 9,000 separately, when you could simply add it to a 100 per cent mortgage and pay a much lower rate.

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