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Saving up for a house deposit is usually the best route onto the property ladder. But it may not always be possible – or quick enough.
Borrowing on a personal loan could plug the gap. But it’s not without risk. Plus, most mortgage lenders won’t accept a deposit if it has been borrowed by way of a loan. Our guide explains more if you’re thinking about borrowing money to use as a mortgage deposit.
Can I use a personal loan for a mortgage deposit?
Very few lenders will accept a deposit that’s been borrowed in this way. This means you’re likely to have little choice of mortgage deal, which means the rates and charges could be high.
It is also highly risky to borrow on a loan to fund your deposit. Effectively it means you have a 100% loan on the property as you will own no equity.
If the property were to fall in value in the short term you could find yourself in what is essentially negative equity. This is where your debt on the property is bigger than the prevailing value of the home.
Taking on both a mortgage and a personal loan could leave you with high combined debt repayments, so it’s also important to think about affordability – both now and in the event that interest rates rise.
How much deposit will I need for a mortgage?
The bigger the deposit you can save the better, or lower, your mortgage rate is likely to be.
To get the most competitive mortgage rates with a smaller deposit, you’ll need to save at least 10% of the property purchase price. Mortgage deals are available to buyers with a 5% cash deposit but the interest rates tend to be much higher. There will also be less choice of deals.
One lender – Skipton building society – is offering a 100% mortgage for first time buyers if they can show evidence of making rental payments for at least 12 months. But 100% mortgages are expensive and come with risks, such as negative equity if house prices fall.
Do I need to tell my lender that my deposit is a loan?
Both the solicitor and mortgage lender will want to know the source of your cash deposit and may ask to see evidence, from bank and savings accounts, of how it has been saved. They’ll want to know it’s from a non-repayable source, such as savings or a gift from parents, for example.
By law, banks must conduct full affordability assessments and credit checks before they will lend a mortgage. They will want to see bank statements to check your financial habits and to be sure you don’t have too much debt and that the mortgage will be affordable. It is important to be open and honest with your mortgage broker or lender from the outset.
What are the pros of borrowing a mortgage deposit?
- Get on the property ladder faster (don’t have to wait to save up)
- Buy before property prices rise futher
What are the cons of borrowing a mortgage deposit?
- Extra debt on top of your mortgage
- Risk of negative equity
- Less choice of mortgage product/potentially higher interest rates
What are the alternatives to borrowing a deposit?
There are a number of alternatives to borrowing a personal loan to fund your house purchase, even if you can’t save up the funds. These include:
100% mortgage. Only one lender – Skipton building society – currently offers a 100% mortgage. It is a five-year fixed rate mortgage available to first-time buyers with a track record of rental payments for at least 12 months.
Gifted deposit. If you’re fortunate enough to have parents, grandparents or other family members who are willing to gift you the money for your deposit, or part of the deposit, then this can be a valuable boost towards home ownership.
Family guarantor scheme. Many lenders offer mortgage schemes that enable family members (typically parents) to help their children on to the housing ladder, either as a guarantor on the mortgage, or by using their savings or other assets as security against the child’s loan for a fixed time.
Family loan. While some family members may not be able to give or gift a deposit they may be able to loan you the money for your deposit. Mortgage lenders will want to know the arrangements behind this sort of loan and the expectations around repayment.
Buy with friends. One way to increase your affordability for a mortgage is to buy with friends. More lenders now allow three and even four names on a mortgage.
What other schemes are available for first-time buyers?
Shared ownership schemes can enable first time buyers to get a foothold on the property ladder without having to pay or borrow the full amount of a property’s value outright. But you’ll still need a cash deposit and eligibility criteria can be strict.
With shared ownership you pay the mortgage repayments on the equity stake you own (this might be 25% up to about 75% depending on the arrangement and scheme) and a rental payment on the other part of the property. You’ll have the opportunity to build up your ownership in the property over time.
The deposit unlock scheme is aimed at first time buyers. It’s not a government scheme, but instead has been developed by the Home Builders Federation, with mortgage lenders and the house building industry. It enables eligible buyers (not just first time buyers) to buy a new build home with a 5% cash deposit.
Lifetime ISAs are available for those aged under 40 who want to save up for a house deposit and get a 25% bonus from the government on their savings.
Frequently Asked Questions (FAQs)
What’s the best way to save a house deposit?
Getting into a regular savings habit is a great way to start building up a cash fund which could be used as a deposit on a first home. Consider opening a Lifetime ISA, if you’re eligible, which pays a bonus on savings and can be used as a house deposit.
Even small amounts of savings made regularly can start to add up over time. Seek out the best paying accounts, whether instant access or fixed rates, and move your money regularly to take advantage of top rates.
Can I use a credit card or overdraft for a deposit?
No. Lenders won’t accept a deposit that is borrowed on a credit card or on your bank overdraft.
Mortgage lenders will need to feel confident you can afford the mortgage and they will look at other debts you have. It isn’t possible to borrow in this way to fund your property purchase.
What is a guarantor mortgage?
Some first-time buyers and those with a small cash deposit or low credit score, for example, use a guarantor mortgage as a way of getting onto the property ladder.
The first-time buyer must have a guarantor who agrees to be jointly liable for the mortgage repayments and the debt in case of the buyer defaulting. While these mortgages can help first-time buyers they are not without risk.
What mortgages are available for first time buyers?
First-time buyers will be able to choose from fixed or variable rate mortgages.
With a fixed rate the interest rate you pay is fixed from the outset for a specified term, this might be two, three or five years, for example.
Fixed rates are popular with first-time buyers because they can help with budgeting – your monthly mortgage repayment stays the same for the duration of the deal.
Variable rate mortgages – which might be tracker or discounted variable rates – can rise and fall when interest rates change, so your monthly repayments can change.
