If you were asked the question, ‘What type of loan do you buy a house with?’ what would you say? Most people would say a mortgage, because that is the most common way to do it, but it isn’t the only way to do it. The term mortgage just means the loan is secured against the property, but it doesn’t necessarily have to be.
Sometimes those who only need to borrow a small amount, could turn to a personal loan instead. It doesn’t sound quite right at first because it isn’t the norm, so I’m going to look at the pro’s and cons of the personal loan route.
The advantages include speed of processing, less underwriting, easier to understand, more lenders to choose from and usually no fees. Personal loans are often much more flexible than a mortgage too, allowing you to repay the whole loan, with maybe only a month or two’s interest as the penalty. If you arrange the loan before you make an offer for a property it may put you in a stronger bargaining position as you would be a cash buyer, which vendors prefer, because the money is there waiting rather than pending a mortgage application. An example of a personal loan available as at 16th February 2016, is with Tesco at a fixed rate of 3.4% over a maximum of 5 years, maximum loan amount of £25,000, and no arrangement or broker fees. This gives a total cost to the borrower of just £2,186 over the 5 years.
There are some disadvantages however. Many lenders would like the loan repaid over a maximum of five or ten years, which can make the repayments higher than desired for some people. The interest rates are usually higher than they would be on a mortgage, although the savings on fees compensates this. Also the maximum amount they will lend you via a personal loan may not be enough for your requirements.
The personal loan option doesn’t just apply to those buying a house. It is also relevant to those who are coming to the end of their mortgage too, who only have a small balance and a few years left.
When comparing the two options you should look at the total cost, so the fees charged and the interest rate. Then you should keep in mind how each option may be suited to you, such as the penalties applicable for repaying the debt early. It isn’t always easy to compare the options, and I would always recommend you seek advice before making any decisions. Importantly, even though you may follow the personal loan option, you should still make sure you protect yourself properly by arranging appropriate insurances for your home, your life and your income.
Jason Hinde FPFS, Cert SMP – Chartered Financial Planner
14th March 2016
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