Taking a loan out while saving for house

[EvenStevens]

I'm currently saving approx €1000 a month with a view to buying a house in the next year or so. (don't laugh please). There is always hope. Anyway I'm thinking of taking out a personal loan for a small sum (1000-1500). I could manage to repay the loan over the course of a year or 18mths, earlier if I can as there is no penalty for early repayment.

Would having this loan really go against me if I was applying for mortgages etc? I will be able to service the repayments and continue to save the same for the mortgage each month. I could dip into savings and not take the loan at all but I'm afraid that would affect my record too.

 

[LDFerguson]

You could just stop your savings for a month or so and use the money for whatever purpose you need it. Banks look for a savings record going back 12 months as part of a mortgage application so if you reckon it will another year or so before you're applying for the mortgage, you'll probably be able to produce an unbroken 12 months at €1,000 per month.

In any event, having a small loan that you pay on time and is fully repaid before you're applying for your mortgage will not go against you. But the first way saves you money.

 

[Leo]

It might depend on the nature of the loan.

Previously applying for a mortgage I had an outstanding motor loan. I had the funds to clear it prior to proceeding, but the bank told me that while clearing it would increase the amount I could borrow, the fact that I had such a loan on my record would affect the affordability calculations as they assumed people with motor or personal loans were likely to take out similar loans in the future.

 

[EvenStevens]

Thanks for the feedback.

 

[Dave_Curry_IMC]

It might depend on the nature of the loan.

Previously applying for a mortgage I had an outstanding motor loan. I had the funds to clear it prior to proceeding, but the bank told me that while clearing it would increase the amount I could borrow, the fact that I had such a loan on my record would affect the affordability calculations as they assumed people with motor or personal loans were likely to take out similar loans in the future.

I don't doubt that someone in the bank told you this, but it is definitely not a credit policy in any bank that operates through brokers (i.e. all but BOI, until they re-enter the broker market in a couple of months). In all my years arranging mortgages, the only time that this type of query was ever raised by a bank was in an extreme case where an applicant had a history of taking out multiple loans, including one that consolidated credit card debt with another loan. The full balance outstanding (around €45k) was being cleared by a gift from a parent, and the bank's underwriter expressed the legitimate concern that the applicant might go back to building up short-term debt after the mortgage was drawn down. The only way that OP would have any problem with a one-off loan of a small amount like that would be if he/she has had a string of loans in the recent past.

As LDFerguson suggested, though, there doesn't seem to be any need to take out a loan in this case. Banks only measure demonstrated repayment capacity over the 6 months preceding the application, so taking around €1,500 out of savings a year or so before would not have any impact on the application, and would save you paying interest.

Best regards,
Dave Curry CFP®
https://www.linkedin.com/in/davecurryirl

 

[Leo]

I don't doubt that someone in the bank told you this, but it is definitely not a credit policy in any bank that operates through brokers (i.e. all but BOI, until they re-enter the broker market in a couple of months).

Both BoI and Ulster Bank told me this, both were approached directly and not via a broker. BoI were a lot more emphatic on the point.

 

[Dave_Curry_IMC]

Both BoI and Ulster Bank told me this, both were approached directly and not via a broker.

Interesting. Being offered a lower mortgage amount because a personal loan was recently cleared might be a standard credit policy in BoI, but it seems highly unlikely. As for all the other banks in the market, including Ulster Bank, I am 100% certain that it is not the case. Sounds like you just got incorrect advice.

 

[Leo]

Sounds like you just got incorrect advice.

Perhaps, I've no insight into their policies so can just relay what I was told. BoI suggested the policy only applied to car loans. I was also surprised one of them had no interest in taking company pension contributions into account (especially at my not so tender years...) while the other took extensive notes.

 

[Dave_Curry_IMC]

Perhaps, I've no insight into their policies so can just relay what I was told. BoI suggested the policy only applied to car loans. I was also surprised one of them had no interest in taking company pension contributions into account (especially at my not so tender years...) while the other took extensive notes.

I assume it was UB that took extensive notes on your pension contributions. They correctly deduct (net) pension contributions from your disposable income available for mortgage repayments (same with AIB/EBS/Haven, whereas PTSB and KBC don't deduct them, and possibly BOI as well, if I am picking you up correctly). However, you can get a longer term with Ulster Bank when you currently contribute to a pension (to age 70, compared to 66 with no current pension contributions), so the reduction in the maximum loan caused by the deduction of pension contributions can be largely balanced off by the increase due to the longer term (not that borrowing into retirement is advisable - that's just how the affordability calculation works at the moment).

 

[Leo]

I assume it was UB that took extensive notes on your pension contributions.

Yes, it was UB who were most interested, particularly in the Employer contributions. BoI didn't take any notes of employee or employer contributions, and also offered a term up to age 70.