100% bond vs 90% bond and 10% personal loan

[Uraeus]

Hi Guys,

I am needing advise as to which to pick, the monthly payments are approximately the
same, just the 100% bond is at a higher rate.

I have been offered a 100% bond at prime + 3.5%, and a 90% bond at prime + 0.9%. I will need to take out a 10% personal loan which will most likely be in the region of 22%.

Does it make sense to take the 90% then flatten the 10% loan, so that after 2-5 years
the rate on the home loan will effectively be prime + 0.9%.

By taking the 100% bond that is committing to prime + 3.5% for the lifetime of the bond, over prime + 0.9% if I take a 90% with 10% personal loan.

Any suggestions to this poor first time buyer?

 

[Nerfherder]

Take the lower home loan rate, its for 20 years.

There is no way to get the bod rate down once you have taken it.

Put all your extra cash in the personal loan.

 

[Uraeus]

My banker tells me it can be renegotiated once the bond is in place, e.g. 6 months down the line, but yes there is no gaurantees at all, which is the scary thing I am worried about.
I thought in the beginning for the personal loan, you can just dump in cash to kill it quick, then after that, dump extra cash into a lower rate bond.

 

[Tomtomtom]

No, don't!

It's very unwise to finance a deposit with an unsecured loan. Does the bank offering you the bond even know that you plan to do this? I doubt they will let you. If you do it without telling them and lie about the reason for the personal loan, you will be in trouble later if you fail to meet payments and have to explain.

http://www.creditchoices.co.uk/loan-for-mortgage-deposit-ask-our-expert.html <-- for the UK but the advice seems good.

Rather save that 10% in cash or borrow from family.

Otherwise, take the 100% bond and pay it down as fast as possible.

 

[Uraeus]

No, don't!

It's very unwise to finance a deposit with an unsecured loan. Does the bank offering you the bond even know that you plan to do this? I doubt they will let you. If you do it without telling them and lie about the reason for the personal loan, you will be in trouble later if you fail to meet payments and have to explain.

http://www.creditchoices.co.uk/loan-for-mortgage-deposit-ask-our-expert.html <-- for the UK but the advice seems good.

Rather save that 10% in cash or borrow from family.

Otherwise, take the 100% bond and pay it down as fast as possible.

Snap, that has been my worry the whole time. How can they expect you to take out a personal loan to pay a deposit. I shouldnt even have these decisions, but in the long term can save so much!

Update:
I read the article, that has helped, thank you. There are so many risks, as no one knows what property market is going to do!

 

[Deep78]

hmmm what bank offered you a 100% home loan?

 

[macxsanity]

yeh which bank offerd you 100 % ??

 

[Uraeus]

hmmm what bank offered you a 100% home loan?

FNB

 

[Nerfherder]

Snap, that has been my worry the whole time. How can they expect you to take out a personal loan to pay a deposit. I shouldnt even have these decisions, but in the long term can save so much!

Update:
I read the article, that has helped, thank you. There are so many risks, as no one knows what property market is going to do!

I assumed you were dead set on getting the bond.

Yes, the obvious choice is not to get the loan, unless you really need/want that house the best option is to save up for that deposit.

I still say that whatever you do don't take the interest rate at prime + 3.5, that is insane.

My rate is prime - 1.8 and its still a butt load of interest.

EDIT: Oh unless that is a fixed rate, then it might actually be worth it.

 

[ToxicBunny]

Prime + 3.5??!?!?! or Prime +0.9?!?!?!

Neither of those rates is very good.

 

[Juice]

Prime + 3.5??!?!?! or Prime +0.9?!?!?!

Neither of those rates is very good.

+1

I was actually shocked to see that. It's almost an overdraft kind of rate, which is unsecured (personal loan) lending. It doesn't make sense unless they came back with a low property valuation or if your risk profile had something in it that made them nervous.

Unless you really, really, really want this particular property, I'd seriously consider passing it up to save for a decent deposit. It's going to make all the difference in the long run.

Juice

 

[Tomtomtom]

I'm not even so sure you will save in the end if you pay 10% of the value with a 22% loan. If you don't get the loan, all the money you would otherwise sink into interest at 22% you can use to pay down your mortgage. What are the terms of the loan?

House prices aren't really going anywhere so saving for a bit could be a good idea.

 

[Tomtomtom]

I just checked. ABSA expects 1-1.5% nominal house price growth for this year. That's below inflation. So it pays to save in the money market now and buy later. If you save at 5% and house prices grow by 1%, it'll be as if you saved at 9%.

 

[Uraeus]

+1

I was actually shocked to see that. It's almost an overdraft kind of rate, which is unsecured (personal loan) lending. It doesn't make sense unless they came back with a low property valuation or if your risk profile had something in it that made them nervous.

Unless you really, really, really want this particular property, I'd seriously consider passing it up to save for a decent deposit. It's going to make all the difference in the long run.

Juice

Unfortunately, for some reason my credit looks horrendous, too many enquiries is what all the banks said? To me doesnt justify prime + 3.5%. The hunt for a home loan has been a nightmare..
And if I sign at prime + 3.5% i need to be prepared to pay that over 20 years.. and OMG, I wont look forward to that. There is no gaurantees that it can decrease in time, they can just spew
another "oh your credit looks bad" story again 6 months down the line :/

Prime - something, OMG, is that even possible. You guys must have bought cars etc then applied for the home loan. Myself, car paid up, bought cash, dont use plenty accounts etc, which looks bad.
Maybe it will be safer to save a deposit (while renting :/ ) then get into it later.. but then what? My credit will look even worse cos they will see an additional 5 or so enquiries so I could get an even worse rate.

 

[Tomtomtom]

Unfortunately, for some reason my credit looks horrendous, too many enquiries is what all the banks said? To me doesnt justify prime + 3.5%. The hunt for a home loan has been a nightmare..

Okay, so while you save, work on improving your credit score. Request a copy of your credit report and figure it out. Do you have any credit cards? Get one or two (can you avoid fees?) but keep them paid down -- i.e. don't use them. Then no enquiries for a while. Let the score improve before going back to the banks.

 

[Nerfherder]

I'm not even so sure you will save in the end if you pay 10% of the value with a 22% loan. If you don't get the loan, all the money you would otherwise sink into interest at 22% you can use to pay down your mortgage. What are the terms of the loan?

House prices aren't really going anywhere so saving for a bit could be a good idea.

Thats only because the interest rates are so low, prime is at 9%, so this means that his rate on the bond will be 13.5, very different to 22 %
BUT three years ago prime was at 15% so his rate could end up being as much as 18.5 and that is not as different.

To me the bottom line is that with the lower bond rate and a personal loan you could POSSIBLY pay off the personal loan fast and end up getting some benefit. With the higher loan at 100% you will just be stuck with that rate forever.

 

[wayfarer]

Good point, prime is pretty low. But +3.5% is exorbitant. Have you tried ALL the banks. It is worth the effort, you'll be paying for 20 years.

You should not pay more than prime. If your credit rating is good, you could get -0.5% to about -2.0. I know of people who got this rate at this low prime (100% bond at std bank for first-time home-buyers - 100% bonds back on their menu since mid 2009, I think). Also, a friend had two credit "judgements" against him, and couldn't get a Neotel contract, but managed to negotiate the banks original offer of p-0.5 to prime -0.75, which makes a difference (also std bank). I agree that you should try to clean your credit record first before initiating this. Even a 0.5% makes a helluva difference.

Anyways, I STRONGLY advise using an originator. The above cases all involve the tough bargaining of bond originators.

 

[poorestguy]

hehe im always surprised to hear people saying you should save rather than buy a place?how can u possibly save when you are paying rent?that option is only true if you are single and sharing a place with someone and therefore you can save. if you are married, then saving money while paying rent is almost impossible, esp if its a single income family.buying is always safer bet, suffer now but u will have something to show

 

[Icarium]

Best bet would be to figure out with a greater degree of certainty why they're only willing to go prime +3.5 - that's a harsh rate and means there's definitely something they consider high risk. If you're certain that it's multiple credit enquiries hurting you, maybe wait a few months for those to fade and then re apply?

Also bear in mind that you're not actually stuck, people can and do move bonds around all the time specifically to get lower rates.

 

[Tomtomtom]

BUT three years ago prime was at 15% so his rate could end up being as much as 18.5 and that is not as different..

That would make the personal loan look better but it would only make total interest and affordability worse.

There's a lot of variables and assumptions obviously. I think the most problematic assumption is affordability. The bond-issuer surely doesn't know about the personal loan expense, which means their assumptions are wrong and they will almost certainly be selling this guy into trouble.