Can I use a loan for my mortgage deposit?
Using a mortgage deposit as your loan is very much possible but you should consider how you go about it as going about it the wrong way could make you ineligible for some of the mortgage options which are available.
Not all mortgage lenders will accept a mortgage deposit which is a loan and those who do may accept getting a loan for a mortgage deposit may only accept a certain percentile of your total mortgage deposit to be a loan.
Why should you consider getting a loan for your mortgage deposit?
Getting a loan for your mortgage deposit will increase the number of mortgage lenders that may be available to you by reducing the mortgage lenders loan to value rate.
Mortgage deposit requirements greatly vary amongst mortgage lenders these days but you could very well find mortgage lenders who are willing to offer you a loan to value of 95% and some who may only offer you a loan to value rate of 80%. If you find yourself in the latter band you may want to increase your mortgage deposit as a means of reducing the loan to value band you fall in.
A lower loan to value band could potentially mean a cheaper rate and therefor cheaper monthly mortgage repayments.
Mortgage lenders generally don’t like borrowers who use loans as their mortgage deposit but based on the circumstances there may be a few mortgage lenders who are willing to lend to you.
What affects your eligibility when using a loan for a mortgage deposit?
When using a loan for a mortgage deposit the mortgage lender may limit how much of the mortgage deposit could be funded by the loan. The mortgage lender will also want to see that you can continue to make your repayments on both your personal loan and your new mortgage.
Mortgage lenders will also assess your debt to income ration and if you have too much debt due to getting a loan for a mortgage deposit you may find that the mortgage lender isn’t willing to lend to you. This could especially be the case if you already have other debt outstanding and then get a loan for your mortgage deposit.
When getting a loan for a mortgage deposit you may also want to consider your credit history.
If you have had bad credit in the past then the mortgage lender may not be willing to lend to you as the may fear that you will likely default on either your personal loan which you have used for a mortgage deposit or your mortgage.
If you have had other loans which indicate that you have been in financial distress such as a payday loans then you may also struggle to find mortgage lenders who may be willing to lend to you. This may be the case, even if you have repaid the payday loan.
Most mortgage lenders may consider borrowers who get a loan for their mortgage deposit as higher risk and therefore may only offer loan to value rates which are much lower and reflect the risk they see with you.
Alternatives to getting a loan for your mortgage deposit
There are a few alternatives to a loan for a mortgage deposit. we will cover a few of them below.
Government schemes for a mortgage deposit
Rather than getting a personal loan for your mortgage deposit,, you may be able to use some of the government schemes which offer loans as well. These will be seen more favourably than personal loans by most mortgage lenders.
- Lifetime ISA– gives you a government bonus of £1,000 if you save a maximum £4,000 a year.
- Help to buy ISA– gives a maximum bonus us £3,000 if you save the maximum allowed of £12,000. Before you get either you should consider which is better. Lifetime ISA vs Help to buy ISA.
- Help to buy equity loan– gives you up to 40% as a 5-year interest-free equity loan. You begin to pay interest at 1.75 % after the fifth year and 1% plus RPI for every year thereafter.
- Shared ownership– You can buy between 25% to 75% of the property initially with a shared ownership mortgage and then buy more using a staircasing mortgage.
- Armed forces help to buy– similar to the help to buy equity loan but specific for the armed forces personnel giving them an increased chance of acceptance.
- Rent to buy– This is the right to buy scheme on which this guide is currently discussing. A different marketing name is just used. Watch out for this when shopping to avoid missing out on eligible properties due to confusion.
- Right to buy– allows you to buy your home at a discount price.
- Preserved right to buy– same as above.
- Right to acquire– similar to the above.
Depending on where you live, you may also be able to take advantage of home buying schemes provided by your local council. Example: In Norwich, the local councils provide the Norwich home options scheme.
Family deposit mortgages
You may also be able to use a family deposit mortgage which will offer you similar benefits as getting a loan for a mortgage deposit but with much less scrutiny than a loan.
If you have family members or friends who may be able to help you with their savings then you may have some family deposit mortgage options such as the family springboard mortgage, they include mortgages from lenders such as the Barclays family springboard mortgage, the lloyds lend a hand mortgage or the post office family link mortgage.
These mortgages act like a form of guarantor mortgages but they aren’t exactly. You may still be able to find some guarantor mortgages which could reduce the strain of a mortgage deposit for you.
Aside from the family springboard mortgages your family members or friends could also simply gift you a mortgage deposit but not all mortgage lenders are keen on lending to borrowers who have been gifted their mortgage deposit and the ones who accept this may insists in a gifted deposit letter which ensures that the gift is indeed a gift and not a loan which may have some claim on the first charge mortgage if the mortgage lender ever had to reposssess the property.
You may also be able to use a guarantor mortgage which may allow you to borrow 100% of the property price as along as a family member or friend guarantees 75% of the property.
If you fail to make your monthly mortgage repayments then the mortgage lender could hold your guarantor responsible.
Using a guarantor mortgage could be considered an alternative to getting a loan for a mortgage deposit.
Equity from existing property
You may be able to use equity from an existing property as your mortgage deposit. You can do this by releasing equity from a property you already own but the mortgage lender who is releasing the equity will want to see that you can keep up on the monthly mortgage repayments.
Your new mortgage lender will also want to see that you can continue to afford your new mortgage repayments plus any mortgage repayments from the property which you released equity from.
Using the equity from an existing property could be considered an alternative to getting a loan for a mortgage deposit.
Credit cards, or overdraft
Using a credit card or your overdraft as a mortgage deposit isn’t so much better either. The mortgage lender will want a declaration to confirm how you have financed your mortgage deposit and may limit the amount of your mortgage deposit you can finance with credit such as your credit card.
Using your credit card or overdraft could be considered an alternative to getting a loan for a mortgage deposit.
Using a directors loan for your mortgage deposit
You may be able to use a directors loan for your mortgage deposit but different mortgage lenders will have their different criteria and not all mortgage lenders may accept this form of financing your mortgage deposit.
Some mortgage lenders may accept the director’s loan if it is derived from funds you have already put into the business before.
Some mortgage lenders may also want proof that the use of these funds as a mortgage deposit will not become a serious financial problem for the business.
Using a directors loan could be considered an alternative to getting a loan for a mortgage deposit.
There may be some tax implications with using a directors loan for a mortgage deposit and you may want to seek independent tax advice.
Funding a mortgage deposit with your pension
You may be able to use your pension to fund your mortgage deposit if you have a self-invested personal pension (SIPP), and you can only use it to fund a mortgage deposit for commercial property and not residential property.
You will usually be required toprovide a plan explaining how you intend to replace the money from the pension.
You should also consider taking an independent tax advisor as there may be some tax implications. Using a pension could be considered an alternative to getting a loan for a mortgage deposit.
Use bridging finance
Bridging finance is a form of lending for flexible and quick-turnaround situations. This could be at an auction or when there are properties that come on the market and you need to move quickly.
Due to the benefits of bridging finance, they are typically much more expensive than a comparable mortgage.
Another option would be to save a mortgage deposit rather than getting a loan for a mortgage deposit.
If you are not sure how to fund your mortgage deposit then get in touch with a mortgage broker who may be able to analyse your financial circumstances and provide you viable options.
Use a mortgage broker for your mortgage in principle
You may want to use an independent mortgage broker to help you get a mortgage on your new home.
Mortgage brokers are important as they can access mortgage products from across the whole of the market in some cases.
This could be over 11,000 mortgage products. This may have some advantages rather than going directly to a mortgage lender.
A mortgage broker will look to understand your financial circumstances and then provide recommendations on which mortgage products may be suitable for you based on your mortgage affordability.
After giving you these mortgage recommendations, most mortgage brokers will seek your consent to apply for a mortgage in principle.
This will allow you to shop for your home as more estate agents and sellers may take you seriously and it will also give you confidence that your mortgage is indeed a possibility before you make a full mortgage application.
Once you have found a home you want to buy and are satisfied with the mortgage offer for your mortgage then the mortgage broker will then look to get you a mortgage offer.
This will come with a key facts illustration document that details the features of your mortgage including how much you will pay per month.
It will also contain information on if there are any limits such as early repayment fees, or annual overpayment limits.
If you are happy with everything you can then go on to secure your mortgage with the help of a conveyancer.
Your conveyancer will manage the legal searches on the property to ensure there aren’t any issues with it.
They will oversee the sales agreement to ensure it is in your best interest, they will manage the transfer of mortgage funds, exchange contracts with the seller or their conveyancer, and set a completion date with the seller or their conveyancer.
This will then bring an end to the conveyancing process, at which point you will receive the keys to the house and move in.
If you need financial advice and you live in the UK then you could contact the Money Advice service over the phone or via chat for impartial advice.
You can also contact the debt charity “Step Change” if you are in debt and need help.