First-time buyers look to loans

First-time buyers aiming to capitalise on the ailing housing market are taking out loans to pay for the deposits, research has shown.

Moneysupermarket.com said in the next year, more than 10% of 18 to 34-year-olds will be considering stepping onto the property ladder for the first time, but of those, 16% may take out a loan to cover the downpayment.

At a time when Council of Mortgage Lenders' figures show first-time buyers pay an average deposit of £32,000, only a quarter of hopeful buyers have the money saved.

Renting until the money is accumulated is the plan for 29% of people who cannot afford the deposit, while 14% are hanging their hopes on property prices dropping further.

The housing and mortgage crisis has seen first-time buyers suffer as the number of loans available to people with only a 10% deposit shrank to 121, down from 1,152 in November 2007.

For their best rates, deposits of at least 40% are being demanded by lenders, with people holding less than 25% deposit facing a restricted choice of mortgages.

Louise Cuming, head of mortgages at moneysupermarket.com, said: "Taking out a loan to pay for a mortgage deposit is a dangerous move, and must be avoided even if it means you have to delay buying your first home.

"Anyone who takes a loan is effectively taking out a 100% mortgage through the back door.

"Not only will the mortgage lender decline the application if it discovers this is the source of the deposit, but it is also a huge risk to the borrower - your monthly outgoings will be higher which means there is a greater chance of you finding yourself unable to keep up with repayments."

She added that people were being priced out of the market by high deposits, and called for lenders to concentrate on assessing the affordability of mortgages case by case.