It has become more difficult in recent years to enter the housing market, especially because of the requirement for 15% equity. Therefore, it is perhaps not surprising that the media has expressed concern that more and more people, especially young people, are using consumer loans and credit cards to scrape together enough money for equity. There is a lot of disagreement about how common it is actually to use unsecured loans as equity and also whether it is at all just negative, so we will take a closer look here.
What is a Consumer Loan?
We have written a lot about this already, so do not go in depth here, but in short it is an unsecured loan you can get quickly, either over the phone or online, and the money can be used for anything. Depending on your personal finances, ability to pay and loan amount, the terms you will be offered vary. Whatever the situation, we recommend you to use a loan calculator, so you can find the best deal.
Use consumer loans as equity for home purchases
There has been a lot of writing in the media, and a lot of disagreement, about using consumer loans as equity in home purchases. GV, Bagens Næringsliv and Afterposten all wrote, at the end of 2013, that since the equity requirement for home purchases increased from 10 to 15 per cent in 2011, it has become more common to take up consumer loans to raise equity. These headings were mainly based on figures from the Norwegian debt collection agency’s association, chairman Baard Bratsberg stated to DN that they noticed a clear rise in the number of consumer loans when banks tightened the equity requirement. He also said he saw no other cause for it than the fact that people started using consumer loans as equity.
E24 later struck back and wrote that it is a myth that using consumer loans as equity is a widespread problem. They had talked to researcher Lara Mulbrandson from the Oslo University College and Akershus (HiOA) who authored the report «Household debt and wealth in the autumn of 2012. In this survey, they found that only 0.6 per cent of those surveyed had used consumer loans as a financing source for equity. Only 0.2 per cent state that they have used consumer loans for equity after the requirement was sharpened. In a similar study, economics professor Allen Karrie Nyhus from the University of Agder found indications that very few young people use consumer loans as equity. She agreed with Gulbrandsen that the problem seemed to be a headache.
E24 did not go there and talk to experts to find out if there has been an increase in consumer loans at all, again was the answer they got no. Senior adviser Regil Hokhaug from the Ministry of Children, Gender Equality and Inclusion (BLD), is a debt expert and confirmed that there has been an increase in the number of consumer loans in recent years, but pointed out that this must be seen in the context of the financial crisis and the large drop in consumption it has produced. Based on that, Rokhaug thought it was not an abnormal increase. Bratsberg responded to E24, saying he had no scientific basis for his statements, but saw a trend where consumer loans are not only used for consumption, but also long-term investments.
Positive and Negative
All cases have at least two sides so we should not be teaching and say that it is only negative to use consumer loans as equity. You can still read about why we do not recommend it as the first resort in 5 things you should not use your consumer loan . Now we have looked again and want to offer views both for and against so that you can make a decision you are happy with. We start with the negative and it can be said that, morally speaking, this is a questionable way to finance home purchases. The reason for this is that it is possible to keep it hidden from the bank while at the same time reducing the ability of the borrower to pay. Consumer loans are more expensive than mortgages so in the worst case it becomes impossible to service and you have to sell the property. The Financial Supervisory Authority presented figures like in 2013 which showed that forced sales of property were at their highest, while the debt collection industry showed that the number of consumer loans increased.
On the other hand, it can be a way to recover in the housing market if you do not have other opportunities for financing. If you buy a home improvement item that you know will add value then using a consumer loan for equity can pay off. Just remember that renovation costs so get a complete overview of what improvements are needed so you can take that into account. When it comes to properties without renovation needs, the value will increase with a normal development in the housing market. This allows you to get a new valuation of the home and in good times you can change the loan-to-value ratio so that it is possible to refinance the loan. That way, you might be able to get rid of the consumer loan after a short time and save big costs. Remember that you also receive tax deductions on your interest expenses.
Conclusion is that there is no need to punish using consumer loans as equity
Just make sure you get the best loan available using our loan calculator, set up one budget and make a good plan for how to service your consumer loan. As long as you manage to pay the installments on time and still cover fixed expenses, it can be a way to achieve your dream home.