Borrowing money for a mortgage deposit

Borrowing money for a mortgage deposit can be a risky decision. Find out more about your options and the alternatives available if you're trying to get on the property ladder.

Key points

  • Taking out a loan for a mortgage deposit may not be an option
  • A family member could gift you the money
  • Saving and playing the waiting game is another sensible option

If you're one of the many people struggling to save up for a deposit towards a home you may be thinking about borrowing money - whether in the form of a bank loan, or from family or friends.

But if you're saving for a deposit you're likely to be a first-time buyer, and borrowing money for a deposit on top of taking out a mortgage can add another layer of risk during an already stressful time.

There are a few things to consider when it comes to raising money for a deposit, plus a few possible alternatives to extra borrowing.

Getting a deposit together

In today's mortgage market you'll need to find a deposit of at least 5-10% of the purchase price of the property in order to qualify for a mortgage.

While a 100% mortgage was an option in the past these are now almost extinct and, in any case, can prove risky because of the chance of finding yourself in negative equity.Low-deposit mortgages

Homeowners who are struggling to save for a deposit because of stagnant wages, the high cost of renting and the cost of living may consider taking out a loan as a way to get a deposit - but this can be a dangerous strategy…

Taking out a loan

Taking out a personal loan to qualify for an even larger debt in the form of a mortgage is greatly frowned upon by lenders and can mean that you aren't approved for a mortgage at all.

When applying for a mortgage a lender will ask for a declaration of where the funds for your deposit came from, and will stipulate that the deposit needs to be from a non-repayable source - such as savings, or a gift from a family member.

Affordability is the key word here; borrowers should ask themselves whether they would be able to pay off a loan and mortgage at the same time
Matt Sanders, Gocompare.com

If a lender finds out that you have a loan to pay on top of a mortgage it may significantly affect its decision, as in effect you are taking out a 100% mortgage with a portion of that borrowing unsecured.

Lenders will check your credit file to see your borrowing history, and you'll have to be honest about the purpose of any loan.

Since the Mortgage Market Review (MMR) took effect on 26 April, 2014, lenders have been checking bank statements thoroughly and may ask you about your spending habits.

While this doesn't mean that you'll be judged harshly for frequent spending and regular meals out, it does mean that a lender will want to be confident that you can afford to repay the mortgage amount every month with enough disposable income left over to pay any loan, bills and other outgoings.

If lenders do accept a loan as a deposit it's likely that they will significantly lower the amount they're willing to lend you, which may defeat the whole purpose. You'll also probably be unable to access the more competitive mortgage rates.

"The MMR means that customers have to think long and hard about taking out a loan to fund their mortgage," said Gocompare.com's Matt Sanders.Cutting the cost of loans

"While it would have been frowned upon before, increased scrutiny being placed on spending habits and borrowing by lenders means that now potential homeowners would find it almost impossible to get a mortgage with a borrowed deposit.

"Taking a loan out will increase a customer's financial liabilities and could potentially reduce their ability to pay additional debts - lenders won't find them an appealing prospect and might doubt whether they could afford the mortgage at all.

"Affordability is the key word here; borrowers should ask themselves whether they would be able to pay off a loan and mortgage at the same time, especially if the terms of the loans are limited to a number of years (which they are likely to be) at a high rate."

Credit cards

Although you can't use a credit card for the mortgage deposit itself, you might decide to increase your credit card day-to-day spending in order to save more of your disposable income towards a cash deposit.

However, as with taking out a personal loan, credit card debt will be taken into account by your lender, so could also limit the amount a lender will let you borrow.

Borrowing from family

Most lenders are likely to accept a deposit if it's 'gifted' from a family member, so long you're under no obligation to repay the money - your benefactor will probably be asked to sign something stating they don't expect repayment.

Many aspiring homeowners have in recent years been limited to relying on the bank of mum and dad

Of course, your circumstances could change after your mortgage is approved or several years later, when you're in a better position and able to start repaying the money, at which time there's nothing to stop you 'gifting' the money back again.

This is less than ideal, but many aspiring homeowners have in recent years been limited to relying on the bank of mum and dad.

Be aware that some lenders will also stipulate who it's ok to take a gifted deposit from - so parents, siblings and grandparents are usually allowed, but wealthy great aunts or family friends might be off limits.

Getting a guarantor

If lenders aren't willing to offer you a mortgage with the amount of money you've saved, naming someone as a guarantor could be an option.

You and your guarantor will have to trust one another - this can be very stressful and will mean you're financially tied to the guarantor and vice versa, which would affect both your credit ratings.Buying a home infographic

A charge would be placed against the guarantor's house, meaning if the borrower is forced to default on their mortgage payments the guarantor would be held responsible.

Offsetting family savings

Parents could use their savings to offset the amount of interest their children will be charged on their mortgage - commonly known as an offset mortgage.

This means that parents would keep their savings and be able to access the money, but would earn no interest on it.

Shared ownership

As part of the government's attempt to hoist more people onto the housing ladder, shared ownership schemes help first-time buyers and others to purchase a share of between 25-75% in a home and pay rent on the remaining share.

You can buy a home through shared ownership if your household earns £60,000 or less, you're a first-time buyer and you rent a council or housing association property.

See the government's website for more information.

Help to Buy

Under Help to Buy, introduced in 2013, if you have a deposit of at least 5% and fulfil the criteria you could be able to get help buying your own home - either through an equity loan or the Mortgage Guarantee Scheme.

The equity loan provides an interest-free loan of 20% of a new-build home's value on top of the 5% you've already saved. There's no interest for the first five years, but after that you'll be charged 1.75% of the loan's value.

Under the Mortgage Guarantee Scheme people with just 5% deposit should find it easier to qualify for mortgages, with the government investing £12bn in mortgage guarantees.How to improve a credit score

Whether these schemes are available will depend on where you live, as schemes differ across the UK.

Get your finances on track

Putting off your decision to buy a home until you've managed to save a larger deposit may be the most sensible option available.

Setting your heart on buying a home and then failing can be a depressing and painful process, but not as painful as having to default on a loan or your mortgage a few years down the line.

The higher the deposit, the more choice you'll have when it comes to getting a mortgage.

You could have access to lower and more competitive rates, which could mean saving thousands in interest.

You may need to take drastic measures in order to save for that mythical deposit, but there are ways to do it.

Speak to a broker

If you're unsure about whether your savings and finances could support a mortgage, the easiest way to find out for sure is to speak to a regulated mortgage broker like London & Country.

Follow the instructions on our mortgage page to find out how to get fee-free, award-winning advice.

By Emily Bater