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Can a loan be used as a house deposit?

author: Adele Kitchen

By Adele Kitchen

It’s unlikely that you can get a loan for a house deposit – and it’s not advisable to do so. Your mortgage application would almost certainly be turned down. Don’t worry though, there’s lots of other help available to get you on the property ladder.

How much deposit do I need to buy a house? 

In order to get a mortgage to buy a house, you’ll most likely need a 10% deposit. 95% mortgages have made a comeback too, meaning there are more options if you only have a 5% deposit. But to get the best interest rates, you may need a deposit of around 20% or more of the property’s value.

Loan to value (LTV) compares how much you’re borrowing on a mortgage to the total cost of the house you’re buying. For example, if you were to buy a house worth £200,000 with a 25% deposit £50,000, you’d need to borrow the remaining 75% of the property’s value (£150,000). This would give you a loan-to-value (LTV) of 75%.

Lenders tend to offer lower interest rates to those with the highest deposits and the lowest LTVs, as there’s less risk of them going into negative equity. Negative equity is where you own more than the house is worth. This can sometimes happen when house prices drop.

So, you should try and save the highest deposit you can before applying for a mortgage, as that'll help you get the best rate for you. Boosting your credit score and finding ways to increase your income should also help.

Can you get a 100% mortgage? 

100% mortgages or ‘no deposit mortgages’ don’t require any up-front payment. This may sound appealing, but there is a high risk that you could fall into negative equity if house prices were to fall. This is why most 100% mortgages were removed from the market following the financial crisis of 2007-2008. Nowadays, the only type of no deposit mortgage currently available in the UK is a guarantor mortgage.

With a guarantor mortgage, a trusted friend or family member signs a legal agreement to promise to pay your mortgage if you can’t pay (for whatever reason). These types of mortgages are usually designed to help people with bad credit to get on the housing ladder.

To be accepted, your guarantor must pass the eligibility criteria set out by the lender. For example, they normally need to have a good credit history, with some savings or property as security.

Be aware that even with a guarantor, there’s no guarantee that you’ll be approved for a mortgage. If you and your guarantor don’t keep up with your mortgage repayments, you could both fall into financial difficulty and your home could be repossessed. Because of the risks involved, guarantor mortgages aren’t very common.

There are other options if you’re struggling to save up a deposit though – we’ll go into these below.

Can you use a personal loan to buy a house? 

While it isn’t impossible to use a personal loan to buy a house, it’s not recommended. Often it can result in your mortgage application being rejected altogether. So, you want to have as little debt as possible when taking on a mortgage, to make your life easier and to improve your chances of acceptance.

Plus, it could affect your affordability and potentially cause you to fall behind on your mortgage repayments. Remember, if you fail to make repayments on your mortgage, the lender could sell your house to claw back funds, in the worst-case scenario.

Can you get a mortgage if you have an outstanding loan? 

Using a loan for a deposit isn’t recommended, but you may be able to get a mortgage if you have an existing loan, as long as you pass the lender’s criteria.

When you apply for a mortgage, the lender will consider your debt-to-income ratio (which compares your monthly debt repayments to your monthly income). Ideally, lenders are looking for a low debt-to-income ratio as this suggests that you’re financially capable and have room in your budget to take on a mortgage.

Having an outstanding loan doesn’t necessarily mean you’ll have a high debt-to-income ratio if your loan repayments are low and your monthly income is high. So there is still a chance that you could get approved for a mortgage, as long as the lender has evidence that you can afford it.

Alternative ways to fund a mortgage deposit 

If you’re not sure how to fund your mortgage deposit without a loan, don’t worry! There are plenty of other options – here’s a few of them to get you thinking.

Save up for a deposit  

It’s an obvious one, but one of the best ways to get a deposit together is to save up. It often feels like we don’t have a penny to put aside, but you’d be surprised.

We recommend making a list of all your income and outgoings (this will also be helpful when working out your mortgage repayments). Include everything, from your £2.50 coffee to the 80p milk you end up nipping out for every week: no amount is too small. Then go through and see where you could make changes to save money. Create a budget and stick to it, then put those pennies towards your deposit.

Read on for more tips on saving for your house deposit.

Family loan 

It’s common for people to get help from their families to buy a home. If it’s possible, it may be a better option than a bank loan, as it won’t show up on your credit report and (hopefully) you won’t have to pay interest. However, you will have to factor in loan repayments on top of your mortgage, which could affect your affordability and chances of mortgage approval.

Getting a guarantor 

As we mentioned above, guarantor mortgages are one of the only ways to get a 100% mortgage. You’ll need to find a family member or friend who’s willing to be legally responsible for your mortgage payments should you fall behind.

Government Help to Buy Equity Loan scheme 

This scheme is aimed at first-time buyers, aged 18 years or over, who are looking to buy a new-build property. You only need to put down a deposit of 5%. Then you can borrow an equity loan of between 5% and 30% of the property price from the government (or up to 40% in London). This reduces the amount you need to borrow on a mortgage, and it lowers your loan to value. 

Bear in mind that a monthly management fee of £1 will be applied from the date you take the loan out until it’s fully repaid. No interest will be applied to your equity loan for the first five years, but in the sixth year, interest will be added, and the interest rate will increase every year in April.

For all the details about fees and charges, please visit the government’s website.

Shared ownership 

Shared ownership is another option if you’re struggling to get on the housing ladder (due to having a small deposit, or being a single applicant, for example). It works on a ‘part rent’, ‘part mortgage’ basis. You own a set portion of the property, and the housing association owns the rest.

There is often the opportunity to buy more shares in the property in the future (known as ‘staircasing’). It’s best to check the terms and conditions of your contract before you sign it, to see if there are any restrictions.

Discover more about the pros and cons of shared ownership.

Disclaimer: All information and links are correct at the time of publishing.

author: Adele Kitchen

By Adele Kitchen

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