Is this a very easy way to boost a deposit, or would it be very silly?

[cheapertorent]

DP is selling his car (worth very little as it’s so old) and taking out a bank loan for a bigger car. Will get about 2k for it.

Loan would be approx 15k. We’ve no other outstanding finance. This was in the plan anyway.

We are wanting to get on the property ladder and saving is taking a while, so we had a lightbulb moment (if you can call it that). I own my car outright, but if I sold that privately (worth 5k) and got a loan of about 7-8k on a new one with our bank, where the interest rates are incredibly low for current customers………

DP and I jointly would have 7k which is a significant boost to our house savings. We currently rent cheaply but I know renting is not secure and it’s wasted money each month, really speaking.

Aware we would just be shifting the problem as cars would then be to pay back, but this seems easier and is affordable rather than just saving that money and it taking 4 or 5 years to be able to put it towards a house.

I hope I’m making sense! Basically just pondering the idea of freeing up the cash in cars to invest it in property.

Can anyone think of any other major issues other than mortgage affordability being affected?

We have sought advice and could borrow in the region of 230-250k currently without having any car loans. The loans combined would be about 22k, so would 22k likely just be subtracted from the affordability test?

Thanks in advance, from a perplexed first time buyer!

I'm sorry, i think you've tried to explain this but i don't understand. Are you saying you're thinking of taking loans out for cars but using them for a down-payment on a mortgage?

I don't really understand what you are saying. Is it you are going to take out loans and use that money as a house deposit?

I’m not quite sure I follow, do you mean take out loans as a deposit on a mortgage rather than buy the car with them? I don’t think you can do that, the bank will ask what the money is for.

Why does your DP need a £15k car? Just get a cheaper one, or just a couple of grand, that’s a crazy amount to take out on a car when you’re saving for a house.

You won't be able to use the loan money as a deposit for the house AFAIK as you have to price where your money has come from and the credit search will show the loans

The banks ask for proof of your deposit (ie bank statement). They won't let you use a loan, as it's not really your money

If you read the fine prints all these loans cannot be used for a deposit for a mortgage. Basically banks will wants to lend you money so you participate in the consumerist circus buying cars, holidays, house improvements, etc. basically for everything and anything you can think of except to improving your circumstances.
I'd say fuck it and do what you need to do.
But be careful how you do it.

I think OP is talking about selling their current two cars for cash which would then be used for the deposit and then replacing them with two cars bought on financing.

That's what I understood, but wouldn't the finance arrangements be accounted for in the mortgage affordability test?

Oh I see

Yes I think she’s just saying they want to sell their cars, make 7 k from them, put it to the deposit, and then take out loans for new cars.

yes totally doable op, but will Impact affordability and how much you maybe able to get on your mortgage, as the amount of debt you have impacts it.

Oh, but taking out a £15k loan to buy a new car will be taken into account on the affordability on a mortgage so I don’t really see why that would help?

OP isn't going to use the loans for a deposit, she's going to use the proceeds of the sales (£7k) and then use finance to replace the cars.

Could you run an affordability calculator through using those circumstances and see what it comes up with, OP? Were you intending to buy near to the maximum?

I agree that it will be factored into affordability so the net impact won't be massive but I guess what it would do is change your LTV ratio which might be beneficial.

Because it's easier and more cost effective to pay £15k of car finance back whilst paying a mortgage than it is to save £7k whilst paying rent.

@Twiz5218 exactly^

Thank you, that’s exactly what I was trying to express! Sorry I wasn’t clear everyone, it’s exactly how Twiz and @Frankensteinisamonster have described

No we weren’t intending to buy near the maximum we were looking at 180-200

Why don't you plug numbers into a mortgage calculator that factors in loan repayments, and see what the total house price you could afford with the current situation vs bigger deposit&car loans.

I don’t see the issue in selling the cars and using the cash. I don’t know how it works in England but here in Ireland they want to see you saving the equivalent of your mortgage payment between saving and rent (if you pay any) on a consistent basis regardless of your deposit.
So for example if you save 500 pcm and pay rent of 1k pcm then your affordability is 1500pcm for mortgage payments.

so I suppose the question is what are you saving each month and have you been doing this consistently?

The lender will ask where the money has come from in one (two) lump(s). You will say we sold our cars. The lender will ask how you're going to replace your cars. You will say you're taking out loans. The lender will deduct from your affordability the payments for your loan.

I can't see how this is going to get you further forward. Just more debt and two shiny new cars on the drive.

You can use money you've borrowed for a deposit, it will show up on your credit file and you will need to redo an affordability assessment with loan values so a realistic affordable mortgage in principle can be created. There are plenty online, so try one out before deciding yoyr approach.

Some property commentators are saying property prices may fall by 20% in the next 18m, but at the same time interest rates will continue to rise. So pick the right time to buy.

I considered taking a loan for a deposit for house no.2 when interest rates were 2.7%. How stupid am I to not have taken out a loan I was already approved for 🙄

He's doing quite a jump - from a £2k car to a £15k car. Is that really necessary?
Conversely, yours - from £5k to £7k - hardly seems worth doing. Would it work if you sold yours, took over DP's old car and he got a new-to-you one? That way you would realise £5k and only have one loan.

These loans aren't those horrible ones with balloon payments at the end, are they?

@senua the first one has been owned for years and has so many miles on it now, the new one would be to keep.

Bank loan rather than PCP so no balloon payments would own from the start. I see what you mean about mine it would just free some cash up I suppose was the thinking

I think I’d get cheaper cars, ideally buy them outright, and then save the money you would have been paying for the car loans on a deposit. If you’re really careful/ strict for a few months (maybe 6?) you’d be surprised how much you’ll be able to save and you’ll be better off long term as you won’t be paying so much in interest for the cars. A 15k car on finance when you’ve not bought your house yet seems a bit mad to me.

Sell the cars, use this money along with your saved deposit to get onto the property ladder. Once on then you can look to borrow more money for new car.

Reduce all your debt thats the secret.

Agree with PP, getting a £15k car on a loan when you haven't managed to save a house deposit is madness. If you have spare money each month to service a £15k loan why haven't you been saving this for a deposit?
Why not just carry on with the old car but saving this surplus money you have every month?
And to then be thinking of replacing both of your cars with financed new ones... To 'save money' 🤦🏼‍♀️ you don't sound very financially literate.

Sell cars buy cheaper add difference to deposit. Sell anything else superfluous. Do you now have enough to buy?