Borrowing money for a mortgage deposit

If you’re struggling to save for a decent mortgage deposit, you might be tempted to take out a loan.  But adding more debt can be risky and might not be the best option.  

So, can you use a personal loan to buy a house or are there better ways to get a deposit? 

If you’re struggling to save for a decent mortgage deposit, you might be tempted to take out a loan.  But adding more debt can be risky and might not be the best option.  

So, can you use a personal loan to buy a house or are there better ways to get a deposit? 

Mark Gordon
From the Mortgages team
4
minute read
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Posted 12 MAY 2021

How much deposit do I need for a mortgage?

The financial uncertainty caused by COVID-19 meant that many lenders weren’t offering 5% deposit deals as they had done previously. But the 2021 Budget introduced a new Government-backed guarantee scheme that could begin to make it easier to get a 95% mortgage again.  

The scheme should enable UK homebuyers to get mortgages of up to £600,000 with a 5% deposit. It runs from April 2021 until December 2022 and you don’t have to be a first-time buyer.  

Generally speaking, however, unless you apply through the scheme, you’ll need a deposit of around 10% to 20%. So, if you want to buy a property for £200,000, a 10% deposit would be £20,000.  
 
The size of your deposit will also be one of the deciding factors in the mortgage deal you’re offered. The bigger the deposit, the more access you’ll have to better deals, with each additional 5% giving you better mortgage terms. And the larger your deposit, the lower your monthly repayments might be.  
 
A 20% deposit could open up more attractive rates, saving you money every month on your repayments. But this would mean saving a significant chunk of money, which you might be tempted to borrow instead. 

Can I get a loan for a mortgage deposit?

It’s unlikely. Lenders usually ask what you want to use a personal loan for. In most cases, they’ll refuse to offer a loan to use as a house deposit.  

Even if you did manage to get one, it’s very unlikely you’ll find a lender who’s willing to approve a mortgage based on a loan deposit.   

Using a personal loan would essentially mean taking on more debt to pay for a much larger debt – your mortgage. This will concern lenders as they’d worry that you wouldn’t be able to cover both the repayments for your deposit loan and the mortgage itself.  

As they see it, if you need to borrow money to pay for your house deposit, it’s very unlikely you’ll be able to afford the mortgage. Even if you only want the loan to cover a small part of the deposit, it could still reduce your chances of getting a mortgage approval.  

If you do manage to find a loan and a mortgage provider who’ll accept it as a deposit, the mortgage amount they’ll offer will probably be much less than you’d have hoped for. You might also find you can’t get a decent mortgage rate.  

Ideally, rather than borrowing more, you should try to reduce your debts as much as possible before applying for a mortgage. This includes credit cards, car financing and overdrafts, as they’ll all be taken into account when you make your mortgage application.  

Does the lender have to know where the deposit comes from?

Yes. The mortgage lender will want to know where the funds for the deposit came from. In most cases, they’ll stipulate that the deposit is from a non-repayable source, for example, savings or a gift, and not a loan that needs to be paid back. They want to be assured you’re not taking on levels of debt that you can’t manage.  

They’ll also want to check your bank statements and ask you about your spending habits to see how capable you are of managing your day-to-day finances.  

When you apply for a mortgage, the lender will also check your credit report. They’ll be able to see information about any loans and your borrowing history, so it’s always best to be honest upfront.  

Can I use a credit card for a house deposit?

No, you won’t be able to use your credit card for the deposit. Mortgage lenders generally insist on funds from a non-repayable source. They’ll also check your credit file and bank statements to see how you manage your finances - so a high level of outstanding credit card debt is not the answer.

How else can I get a house deposit?

If you’re worried about raising enough cash for a deposit, there are other options to consider:  

A gifted house deposit  
If your parents are willing to help you out, they can give you the deposit in the form of a ‘gift’. You’ll need to declare it as a genuine gift and your parents will also need to make a statement confirming there’s no obligation to pay it back.  

A family loan  
If your parents want to lend you the money, you’ll have to declare it as a family loan and have a formal repayment plan in place. Some lenders might accept this type of loan as a house deposit, as it gives them the reassurance of family backing. But it might limit your choice of mortgage deals.  

A guarantor mortgage
A 100% guarantor mortgage means there’s no need for a deposit. However, a close family member - usually your parents – will need to guarantee to cover the mortgage repayments if you’re not able to. Instead of a deposit, they would be putting their home or savings up as collateral to secure the mortgage.  

This is a massive commitment for both parties and a big risk. Both you and your guarantor could risk losing your homes if you don’t keep up with the mortgage repayments. 

Affordable home ownership schemes

If you’re a first-time buyer, you might be eligible for one of the following government schemes that are set up to help people get on, or move up, the property ladder: 

  • Help to Buy: Shared Ownership   
    Lets you buy a share of your home – between 25% and 75% - and pay rent on the rest. You can then buy more shares in the property later on, up to 100% ownership. 
  • Help to Buy: Equity Loan  
    A low-interest government loan towards your deposit. You can borrow up to 20% of the cost of a new-build home.  
  • Right to Buy  
    If you’re a council tenant, this scheme could help you buy your home from the landlord at a discounted price. Some mortgage lenders will accept the discount as a form of deposit.  
  • Lifetime ISA  
    A tax-free Individual Savings Account designed to help young homebuyers under the age of 40 save up for a deposit on their first home. The government will add a 25% bonus to your savings, up to a maximum of £1,000 a year.  

Start saving

Saving up for a deposit isn’t easy, but it is possible. It may involve some spending sacrifices, but careful budgeting could mean you’ll be able to reach your deposit goal a lot quicker. Cutting back on your monthly bills is a good place to start. See if you can find a cheaper deal on your broadband, mobile, electricity, gas or car insurance

Low interest rates may be good for mortgage holders, but for savers you need to make sure your money is working as hard as possible, so check to see if you can find a higher rate of interest for your savings account.  

The most sensible option might be to put off buying for the time being and save as much as you can. A decent chunk of deposit could give you access to better mortgage deals at more competitive rates. It will also give you time to get your finances on track and work towards building your credit score. A larger deposit and a good credit rating could mean a lower mortgage rate, which could save you thousands in interest in the long run.  

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