Should I Borrow Money to Cover the Cost of a Deposit?
If you want to buy or rent a property you will normally need to put together a deposit. For rental this will normally be a few months’ rent and perhaps a little more but for buying a home it can be up to 10% of the value of the property which is significantly more. Either way, you will need to get together the necessary money and there will be different options for doing it. You may feel that borrowing will be the only way, but there are other options too and it is good to find out about them all before deciding on which one to use.
Get a loan
Getting a loan can be a really fast way to get the money that you need. You will have to arrange it with a lender but it is unlikely to take that long and so you should have the money that you need pretty quickly. This means that you will be able to get on with moving into the property that you want without much time lost. However, loans do cost money of course. If you are having to make repayments on a loan as well as paying rent, you may find that the costs get too much for you. It is also worth noting that a loan may make it harder to get a mortgage. You mortgage lender will look at your financial records and see what outgoings you have to cover to ensure you have enough to repay the mortgage. If they see that you have a loan, they may look on this unfavourably and they may not be happy to lend to you as a result.
You will need to weigh up the pros and cons here. Getting a place quickly is obviously a big advantage but having the repayments to make could be difficult to manage. You will also be wise to calculate the cost of the loan and work out whether you really think that it is worth taking out considering how much it would cost. You could wait a while and try other methods to get the deposit together and these could be better suited to you.
If you have some savings already then using these could be really sensible or if there are not enough, then using them towards the deposit. It can be hard using savings for things like this, especially if you have been saving towards something else. It is hard work to save money and it can also feel good knowing that you have some savings behind you. Therefore, using the money to pay for a deposit may feel like the wrong thing to do. You may feel that you need those savings to fall back on or you have worked so hard to get them that you are just not prepared to spend them. It is worth remembering though that savings do not accumulate very much interest and so they are not doing much for you financially. If you do use them you will be able to either get the property more quickly or avoid using a loan. Loan interest is always more expensive than savings interest and so it is better financially to use savings rather than getting a loan if you can. If you are saving for something specific then you will need to decide whether it is worth paying that extra money for. Calculate how much it will cost you to have a loan compared with keeping the savings and decide whether you think that it is worth it.
If you do not already have any savings, then you will have to save up if you want to pay a deposit and not use a loan. This will take time and you may find it rather frustrating that you will have to wait so long until you can move into the home you want while you save up. It is also very likely that the specific property that you are interested in will not be available by the time you have saved up the deposit. However, delaying may be advantageous as you may find an even better house becomes available. It will also help you to get into the habit of being disciplined with money and not spending everything that you earn, which is very useful for once you move into a new home as there will be lots to pay for and you will need to be really careful about how you prioritise your spending.
So, it is important to think hard about what to do in this situation. The decision that you make could have a significant impact on your future and so it should not be taken lightly. You need to think about this carefully and make sure that you have considered every option so that you know that you made the right decision.