Getting a Loan for Your Mortgage Deposit
Saving up for a mortgage deposit demands both time and patience, especially with the relentless rise in house prices and cost of living. As you save, the required amount only seems to escalate. As a result, you may have considered borrowing the money to expedite the process.
Although it's not as straightforward as it seems, it can be feasible under certain conditions. This article contains all the details you need to know about securing a loan for your mortgage deposit. We’ll cover:
Can you use a credit card or overdraft for a mortgage deposit?
Can you take out a director’s loan to use as a mortgage deposit?
Can you use a loan for a mortgage deposit?
While it's possible to get a loan for your mortgage deposit, it's a decision that warrants careful consideration. In essence, it entails a 100% LTV mortgage, leaving you with no equity in the property and adding debt upon debt, which can pose significant risks.
Securing such a loan might prove challenging, as lenders are cautious about extending credit when you're already managing substantial debts. They conduct rigorous affordability assessments to ensure your ability to manage repayments comfortably.
If your existing debt raises concerns about your financial stability, obtaining a mortgage could become an uphill battle. Moreover, even if you do secure a mortgage, it's likely to come with a high interest rate, resulting in substantially higher long-term costs compared to other deposit funding methods.
Does the lender have to know the deposit source?
Absolutely. Mortgage lenders require transparency regarding the origin of your deposit funds. Typically, they specify that the deposit must stem from a non-repayable source, such as savings, rather than a loan requiring repayment. This is to ensure you're not taking on unsustainable levels of debt.
Additionally, they'll scrutinise your bank statements and inquire about your spending habits to assess your financial management capabilities. During the mortgage application process, your credit score will also undergo evaluation. Any loan information and borrowing history will be visible to the lender, underscoring the importance of honesty from the outset.
If you want to get an idea of your eligibility before you apply, then you can use our free credit check tool (£14.99 per month after the free 30-day trial). Using it will help you to view any possible mistakes or fraudulent activity on your profile, so that you can handle any issues quickly. The trial and subscription can be cancelled at any time.
Can I get a mortgage if I have an outstanding loan?
Yes, it's possible to get a mortgage if you have an outstanding loan, but approval hinges on your debt-to-income ratio. Specifically, most lenders prefer a debt-to-income ratio of around 50%.
On top of this, carrying existing debt may limit your access to the most competitive mortgage rates. As a general guideline, it's advisable to prioritise paying off any outstanding debts before applying for a mortgage.
Can you use a credit card or overdraft for a mortgage deposit?
No, it's not advisable to use a credit card or overdraft for your mortgage deposit. As we mentioned, lenders generally require funds from a non-repayable source. Therefore, opting for high-interest credit instead of saving for a deposit is risky and will reflect negatively on your creditworthiness, potentially leading to rejection.
Can you take out a director’s loan to use as a mortgage deposit?
If you're a director of your own limited company, you might have initially invested personal funds to establish the business instead of saving for a mortgage deposit. Once your company accumulates sufficient retained profits, you can reclaim this amount, and many lenders accept these funds as a valid contribution toward your mortgage deposit.
For more on this topic, refer to our guide on mortgages for limited company directors.
Alternative ways to fund a mortgage deposit
Gifted deposit or family loan: If your parents or close relatives are willing to assist, they can provide the deposit as a gift. Note that you must declare it as a genuine gift, accompanied by a statement from them confirming it's non-repayable. Alternatively, if they opt to lend you the money, it becomes a family loan requiring a formal repayment plan and will thereby limit your choice of mortgage providers.
Mortgage Guarantee Scheme: The mortgage guarantee scheme makes it less risky for lenders to offer 95% LTV mortgages. This means that individuals are able to buy a home with only a 5% deposit.
Guarantor mortgage: A guarantor mortgage often eliminates the need for a deposit. Instead, a close family member pledges to cover mortgage repayments if necessary, using their home or savings as collateral.
Shared ownership: Shared ownership mortgages enable purchase of a percentage share (25% to 75%) of the property, with rent paid to a housing association for the remainder. Gradually, you can buy additional shares until you achieve full ownership (100%).
Right to Buy: Council tenants may benefit from the Right to Buy scheme, purchasing their home from the landlord at a discounted price. Some lenders will consider this discount as part of the deposit.
Speak to a broker before getting a loan for a mortgage deposit
Given that this path to homeownership implies complexity, a lot of mortgage brokers lack experience in handling such applications, limiting their ability to find the right lender. As such, it's vital to seek guidance from professionals familiar with niche cases like this.
At The Mortgage Genie, we firmly believe there's a mortgage solution tailored to each individual, and our team of seasoned brokers has the market expertise necessary to identify the product that best aligns with your unique financial situation.
Likewise, we're dedicated to exploring all available alternatives to secure the ideal arrangement for you. Simply give us a call at 01915809890 to get in touch. And why not see how much you could borrow up to today by using our mortgage calculator?
This information is a guide only and should not be relied on as a recommendation or advice that any particular mortgage is suitable for you. All mortgages are subject to the applicant(s) meeting the eligibility criteria of the specific lender. You should make an appointment to receive mortgage advice which will based on your needs and circumstances.