Can I use a personal loan for a mortgage deposit?
Getting a suitably sized deposit together in today's mortgage market can be quite challenging. Saving tens of thousands of pounds can take an eternity or seem impossible against all of life’s other expenses, especially with the cost of living hitting all-time highs.
The typical minimum deposit in today’s market stands at 10%; even at the lower end, that could equate to a deposit of around £10,000. However, most lenders would prefer to see 20% of the property price, and with property prices getting higher all the time, you’ll be looking at everything and anything upward of £20,000.
The average property price in the UK stands at around £275,000, with a 20% deposit equating to £55,000. That’s a big ask for most borrowers, never mind a first-time buyer looking to take their first steps onto the property ladder.
Getting a loan for a mortgage deposit looks like a good way to get around the problem, so today, we’re going to answer one of the questions we get asked more than most: can I get a loan for a house deposit?
Everything you need to know about a mortgage deposit loan
The good news is—yes, you can. However, it comes with downsides that saving up the hard way doesn’t.
A loan could be your best option if you can’t save the required amount. But even being able to raise the 10 or 20% you need through alternative methods doesn’t mean lenders will look as favourably on your application as if you’d managed to raise the amount through your savings.
Debt-to-income ratio
Your lender will carry out the same calculations regarding your mortgage affordability assessment, but now they’ll also include the repayments and interest charges from the additional loan.
Your affordability assessment calculates what you can afford to repay, taking into account all of your loans, regular payments, and direct debits, as well as what you spend each month on bills, entertainment, and more.
This calculation builds your debt-to-income ratio. Every lender needs to be sure that your income can comfortably cover your total debt amount each month, as well as being able to afford to live a comfortable quality of life.
Considering that you’ll be paying even more each month to include the repayments on your deposit for a house loan, it’s highly likely they’ll offer you less money at a higher interest rate.
This could be the only way for some borrowers to get a mortgage. Creating the best possible version of your figures is a healthy step. It’s a good idea to consider all your usual outgoings to see if you can drop those that you don’t really need or can live without until you’ve spent a few months with your new mortgage, to see how much money you’ve got left at the end of each month.
Family loans and gifted deposits
It’s become quite acceptable to take a little help from your family members when making those first moves into the property market, with the bank of mum and dad often being the only way for many young first-time buyers to raise their deposit. Lenders will look far more generously on interest-free loans, or even better, as investments or an outright gift. Be aware, though, that gifted deposits and investments have tax implications, which need looking into.
Family loans are treated the same as other loans, adding to your affordability assessment calculations, but with the general understanding that there is likely to be a little more leniency if things get tough. You’ll need to draw up a contract for your lender, but apart from that, it’s a good way to achieve the deposit you need.
Using your credit card or overdraft to make up your house loan deposit
Even if you take out a loan to help achieve your deposit, most lenders want to see at least 5% of the deposit come from your savings. So boosting what you’ve managed to save with a loan or on your credit card or overdraft will stretch you to your limit.
Lenders are likely to take a low view of such applications and are highly likely to reject them as being too high a risk.
Taking out a director’s loan to use as a mortgage deposit
Another question we’re regularly asked is, can I get a loan for a house deposit (UK) through my business?
Business owners have an option to borrow money from their operations as a director’s loan if it can support the amount needed to deliver the required deposit.
However, there are tax implications for both the business and the director when choosing this route as an option.
Directors' loans must be included in year-end accounts and the company tax return. Therefore, each loan is likely subject to corporation tax, income tax (up to 40% rate), and possibly taxable benefits in kind.
A director’s loan can be costly if it isn’t planned correctly, with tax liabilities affecting the borrower. Get it wrong, and it could cost you more than borrowing from other means. However, if you’re smart and get it right, there are tax advantages to benefit you and your pocket.
Could you qualify for a bridging loan to raise the deposit?
Bridging finance is a popular, short-term option that landlords, builders, and housing developers use when looking to raise funds quickly—as they’re reasonably fast to arrange and offer flexible terms.
However, bridging loans tend to come with higher interest rates, so they aren’t ideal for longer-term options that need building into your mortgage repayments, affecting what you can afford to borrow.
Speak to the experts to find out the best solution for you
There are specialist lenders who will take every case into consideration, wherever the money for the deposit is coming from, so never lose hope. Can you use a loan for a house deposit? We see it happen every week; you just need to match with the right lender.
Speaking to an expert mortgage broker who understands every corner of the market and regularly works with just the type of lender you need is your next best step.
Give CLS a call today. You could be a few simple steps from achieving the funding you need for your new home, whether that includes taking out a loan for a house deposit or not. We’re here to help everyone get on the property ladder—we all deserve a home we can call our own, after all.
