Using Loans for Your Mortgage Deposit

Nikka Sulton

Using Loans for Your Mortgage Deposit

Saving for a mortgage deposit takes time, and rising house prices can make it feel like a never-ending struggle. Borrowing the money might seem like a shortcut, but it’s not always straightforward. In certain situations, it’s possible through options like government equity loans, private equity loans, or unsecured loans. Let’s explore these choices.

Can you get a loan for a mortgage deposit?

Wondering if you can secure a loan for a mortgage deposit? Yes, it’s possible. If you’ve saved a small deposit (around 5% of the property value), some lenders may offer you an equity loan of up to 25% of the property value, which you can use toward your deposit. However, there are pros and cons to consider. While it can improve your mortgage rate, only a few lenders entertain such applications, and there are associated fees and potentially high interest rates.

Alternatively, you can explore using an unsecured loan to boost your deposit. This option is limited, as most lenders prefer to be your primary debtor. But if you have minimal other debts and sufficient income to cover both the loan repayments and your mortgage, it’s a possibility worth exploring.

Do I need to tell my lender that my deposit is a loan?

When it comes to your cash deposit for a mortgage:

1. Source Verification: Both your solicitor and mortgage lender will inquire about the origin of your cash deposit. They may request evidence, including bank and savings account records, to confirm how the funds were accumulated. It’s crucial that the source is non-repayable, such as personal savings or a gift from parents.

2. Affordability Checks: Banks are legally required to conduct comprehensive affordability assessments and credit checks before approving a mortgage. This involves reviewing your bank statements to assess your financial habits and ensure that your debt levels are manageable, allowing you to afford the mortgage. Being transparent with your mortgage broker or lender from the beginning is essential in this process.

Borrowing a mortgage deposit comes with its advantages and disadvantages:

Pros:

1. Speedy Property Entry: Borrowing allows you to enter the property market swiftly without the need to wait for extensive savings.

2. Beat Rising Prices: You can purchase a property before prices escalate further, potentially securing a more affordable deal.

Cons:

1. Additional Debt: Borrowing means taking on extra debt in addition to your mortgage, increasing your overall financial obligations.

2. Risk of Negative Equity: In some cases, borrowing a deposit may expose you to the risk of negative equity if property values decline.

3. Limited Mortgage Options: Borrowed deposits may limit your choice of mortgage products and could result in higher interest rates, impacting long-term affordability.

How does a mortgage deposit work?

A mortgage deposit involves paying a portion of your home’s price upfront, with the rest covered by a mortgage that requires monthly payments. A larger deposit results in paying off more of the house initially, potentially leading to lower monthly repayments and reduced mortgage interest costs.

How to get a mortgage using a loan for your deposit

Here’s a straightforward three-step process to secure mortgage approval with a borrowed deposit:

1. Seek Expert Advice:

Before considering borrowing, consult with an expert to determine if it’s the right approach for your mortgage. Discuss the loan type, borrowing amount, and explore alternative options.

2. Apply for the Loan:

Once you’ve decided on borrowing, initiate the loan application process. The procedure varies depending on whether you opt for an unsecured personal loan or an equity loan.

3. Choose the Suitable Lender:

Note that most lenders don’t accept borrowed deposits, limiting your options. Rely on your broker to identify the best available rate and recommend the lender that aligns with your situation.

Lenders and eligibility criteria

Several lenders, including Generation Home, Barclays, Kensington Mortgages, Tipton Building Society, and Stafford Railway Building Society, may consider deposits partially funded by privately sourced equity loans.

Lenders such as Santander, Norton Home Loans, Saffron, and Together are open to deposits from personal loans. It’s crucial to provide lender details, loan amount, terms, and security information. Additionally, meeting the lender’s eligibility criteria, including age, income, and employment status, is essential.

Notably, not all mortgage applications with borrowed deposits are guaranteed approval. Due to thorough scrutiny, it’s advisable to collaborate with a broker to strengthen your application’s chances.

How to save for a deposit

Here are practical steps for saving for a mortgage deposit:

1. Set Realistic Savings Goals:

Determine the monthly amount required to reach your overall savings target. Consider setting up a standing order to automate your savings, similar to paying a monthly bill. Saving steadily over a longer period can make achieving your goals more manageable. For example, saving £150 per month for 10 years would accumulate £18,000, including earned interest.

2. Save with a Partner:

Collaborating with a partner can make saving for a deposit easier and quicker. Pooling resources allows for faster progress toward your mortgage deposit goal.

3. Help from Relatives:

Many turn to family, often referred to as the “bank of mum and dad,” for assistance with a cash gift. Ensure you inform your lender about this gift and provide evidence that it’s not a loan.

4. Shared Ownership:

Consider shared ownership, where you buy a portion of the property and pay rent on the rest. Shared ownership mortgages typically require a smaller deposit because you’re not purchasing the entire property’s value. However, keep in mind that you’ll also have ongoing rent payments for the portion you don’t own. Note that shared ownership mortgages may be available primarily to first-time buyers.