Getting on the property ladder is a goal many people aspire to achieve.
However, saving up for a deposit can take time, especially if you’re no longer living in the family home and are paying rent and other bills.
However, saving up a good deposit can set you up for a more affordable mortgage. The higher the deposit you can save, the more mortgage products you’ll find available with interest rates that may be lower. This is because people who manage to save a deposit are seen as financially secure and therefore a lower risk as borrowers.
If you’re struggling to put money away, you may be wondering if taking out a loan for a house deposit or other line of credit to use as a deposit is possible. While it can be done, in theory, it will jeopardise a mortgage application.
Can I get a loan for a house deposit?
The short answer is you shouldn’t. The main reason banks and other lenders want borrowers to raise a deposit is to demonstrate their financial health. By taking out a line of credit or personal loan to cover a mortgage deposit, borrowers are demonstrating the opposite.
All mortgage providers will want to know where your deposit has come from. Most will not approve a mortgage application if the deposit has been borrowed, and the few that say yes will offer a limited package of mortgage products that will not be the most affordable or attractive.
If you take out a personal loan for a house deposit at the same time as taking out a mortgage, you are voluntarily increasing your monthly outgoings. If you’re applying for a mortgage, lenders prefer to see applications with as little debt and monthly expenses as possible.
Most mortgage providers will be reluctant to allow borrowers to apply if they’re repaying a lot of debt already. Attempting to take out another loan for the deposit doesn’t demonstrate financial stability, and could suggest an inability to keep up with repayments in the long term.
Can I pay a house deposit on a credit card?
Mortgage providers look at an applicant’s total monthly expenditure before considering if they will sign off on a mortgage loan. A large part of this consideration is how much debt the borrower is already liable for and how large their monthly repayments are, including credit card debt.
Not only is attempting to use a credit card to pay a deposit likely to result in a refused application but it is also an extremely expensive way of borrowing money long-term. Lenders will have concerns about your ability as a borrower to meet your mortgage repayments, at the same time as paying off a sizeable credit card bill.
Can my family lend me money for a house deposit?
Loans from family are just as off-putting to mortgage lenders as loans from anywhere else. Although they are usually interest-free, borrowing money from family to buy a house still represents an additional monthly outgoing and an inability to save.
If a family member were to gift the amount you need for the deposit, however, with no need for you to pay it back, that would usually be acceptable to a lender. If this is the case, the borrower will need evidence to prove the money does not have to be paid back. There may also be restrictions on who can gift the money and how much they can give. Cash gifts may only be accepted as a deposit if they come from close family members such as parents, grandparents or siblings.
What are the alternatives to a loan for a home deposit?
When considering how to get money for a mortgage deposit, there are several alternatives to taking out a loan for a home deposit. Bear in mind that these are not shortcuts and all require good financial management skills over the long term.
Get your finances on track
Mortgage providers take a close look at a potential borrower’s credit history before determining whether they are eligible for a mortgage and which mortgage deals they will be offered.
Lenders aren’t necessarily looking for people who are debt-free – the best candidates are those that have a history of borrowing and using credit wisely, making repayments on time and not getting further into debt due to long-term loans adding on interest.
There are a few key things borrowers can do or check to get on track, such as:
- ensuring all repayments on existing loans are up to date
- that you are on the electoral register
- and are not living beyond your means
Lenders will also want to see bank statements and an overview of all expenses and income to ensure you’re capable of making mortgage repayments.
Reduce your debts
Having existing debt is not necessarily an issue in itself when applying for a mortgage, as long as the borrower demonstrates good financial management and an ability to make repayments on time. However, reducing debt before applying for a mortgage allows lenders to see that the borrower is financially stable and can manage their responsibilities. Getting a loan for a house deposit will almost always result in that mortgage application being denied.
The lower your personal debt is at the time of applying for a mortgage, the more likely you are to be accepted. You may also find you have access to better mortgage products that will reduce the total amount repayable over time.
Look into Shared Ownership and Right to Buy schemes
Shared ownership and Right to Buy schemes allow families and individuals in the UK to get a foot on the property ladder, without necessarily having to save up for a large deposit.
What is Right to Buy?
Right to Buy is the right of a council tenant to purchase the property they already live in at a reduced rate. Discounts are applied on a scale determined by how long the resident has been a council tenant.
There are varying levels of discount, depending on whether the property is a house or a flat and the length of the tenancy, with different rules in different parts of the UK. In England, the maximum discount available currently stands at the lower of £84,600 or 70% of the value of the property.
Many mortgage providers will accept applications without a deposit for Right to Buy purchases as the value of the discount acts as a deposit.
What is Shared Ownership?
Shared ownership allows the purchase of part of a property through the Help to Buy scheme and is designed to help lower-income families and individuals enter the property market.
Through shared ownership, residents can purchase a percentage of the property they live in (typically between 25% and 75%) while continuing to pay a reduced rent on the remainder.
If you own a share of your home and wish to sell, you are legally obliged to give your landlord first refusal and the opportunity to find a buyer. If the landlord does not want to buy your share or find a buyer, you then have the right to sell your share yourself.
Learn more about applying for a mortgage and other personal finance topics by checking out the Norton Finance Know How blog.