In this brief guide, we are going to discuss the question “ will getting a personal loan affect getting a mortgage”.
You may be wondering if you can get a personal loan for a mortgage and what the consequences of getting a personal loan for a mortgage may be.
It is very much possible to get a mortgage with a personal loan as part or all of your mortgage deposit but this may reduce the number of mortgage lenders who may be willing to lend to you.
Will getting a personal loan affect getting a mortgage?
Yes, using a personal loan will affect your ability to get a mortgage as it may increase your debt to income ratio, reduce your monthly disposable income and could potentially cause a dip in your credit score.
Getting a personal loan for a mortgage deposit
Most mortgage lenders may not offer mortgages to borrowers who intend to fund their mortgage deposits with personal loans.
With that being said, it is important to note that it is still very possible to fund your mortgage deposit with a personal loan and some mortgage lenders will accept this based on your overall mortgage affordability.
If you are looking to fund most or all of your mortgage deposit with a personal loan then it may be worth speaking to a specialist mortgage broker who could advise you on which mortgage lenders may be more willing to lend to you.
When looking to fund your mortgage deposit with a personal loan, the key things most mortgage lenders will look for is to see if your debt to income ratio is high and what monthly disposable income you have after paying off all your committed debt expenses each month.
If this figure is not sufficient enough to cover your monthly mortgage repayments then you may find it much harder to get a mortgage lender to offer you a mortgage.
If your debt to income ratio is high then you may also find it a bit difficult to find mortgage lenders who may be willing to offer you a mortgage.
Most mortgage lenders will have a debt to income ratio cap which they will accept anything below so having a high debt to income ratio due to taking out a personal loan to fund a mortgage deposit could leave you with very few mortgage lenders to choose from and this could mean the mortgage rates you are offered are not competitive and you could potentially end up with a high mortgage rate and consequently high monthly mortgage repayments.
In most cases, these potential high monthly mortgage repayments may be beyond what your monthly disposable income could cover and hence leave you unable to secure a mortgage offer.
In any case, let’s assume all of the above does not apply to you and you are indeed able to use a personal loan or similar loan to fund your mortgage deposit.
The mortgage lender will need to be satisfied that you can afford both the monthly repayments on the personal loan and still be able to afford the monthly mortgage repayments with some room for other lifestyle expenses such as the gym, dining out etc.
Most mortgage lenders will required a mortgage deposit of 20% if you are funding your mortgage deposit with a loan so naturally, the next question is what are your options?
Your options will be to get a personal loan but outside of this, there may be other alternatives to getting a personal loan for a mortgage deposit which you may want to consider.
Can you get a personal loan for your mortgage?
There are various factors which may affect your ability to get a personal loan for a mortgage, they include:
Your credit history
Your credit score is an important factor when determining if you can get a personal loan for your mortgage. If you have bad credit such as the below then you may not be able to get a personal loan.
Bad credit includes:
- County court judgement
- Debt management plans
- Individual voluntary arrangements
- Missed credit payments
- Payday loans
Your income will also determine if personal loan lenders are willing to lend to you. If you do not have enough income which proves that you are able to repay the personal loan then you may find it much harder to be approved for a personal loan.
Your other debts
If you have too many other debts then you may find it much harder to get a personal loan as many lenders may wonder if you are able to manage all your monthly repayments and may feel that you are more likely to default on your personal loan.
The personal loan lender may also take into account the other types of loans which you have. If you have other loans which are secured or unsecured then this may influence the personal loan lenders motivation to lend to you.
Alternatives to getting a personal loan for a mortgage
Before deciding on if to get a personal loan for a mortgage you should consider what your potential alternatives may be and if you want to use any of the alternatives.
Below are some of the alternatives to using a personal loan for a mortgage.
Use a government scheme
In some cases, these first-time buyer government schemes will reduce the amount of the property price and thereby increasing the amount of mortgage deposit you have in relation to the property value.
In other cases, these first-time buyer schemes will simply provide you with a loan to fund your mortgage deposit.
These first-time buyer government schemes can be used by home movers and first-time buyers.
These schemes include:
- 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.
Get a gifted deposit
Another alternative to getting a personal loan for a mortgage deposit would be to get a gifted deposit from a family member or friend.
With a gifted deposit, a friend or family member will gift you a mortgage deposit. This is not a loan but rather a gift and hence they will have no claims on the property.
Most mortgage lenders will insist on a gifted deposit letter using their template to ensure that the gift is indeed a gift and not a loan.
Other alternatives to using a personal loan for a mortgage include
- Get a family springboard mortgage
- Geta guarantor mortgage
- Get a smaller mortgage
- Wait it out
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.
In this brief guide, we discussed the question “will getting a personal loan affect getting a mortgage “. If you have any questions or comments please let us know.
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.