Borrowing money for your mortgage deposit

The average UK house price reached a record high of £286,079 in April 2022, according to the Halifax House Price Index. That’s an increase of over £47,000 in the last two years.^[1]

This means that even if you have a relatively low deposit of 10%, you’ll need to fork out over £28,000, which is a challenging prospect with just about every household bill on the rise. 

So, can you fund your house purchase by taking out a personal loan?

Can you use a loan for a mortgage deposit?

It’s possible to take out a loan to fund your mortgage deposit, but it’s not a decision to take lightly.

Essentially it’s a 100% mortgage as you’ll have no equity in the property, adding debt on top of debt, which can be very risky.

It will be difficult to find a mortgage provider willing to lend to you, as they’ll be aware that you’ll be paying off two large debts simultaneously.

Lenders conduct thorough affordability checks before making a mortgage offer to ensure that you’re able to cover your payments comfortably. If they think that your existing debt could impact this, you may struggle to find a mortgage.

Even if you’re offered a mortgage, it’s highly unlikely that it will have a competitive interest rate, so you’ll end up paying a lot more in the long run than if you funded your deposit a different way.

What affects eligibility if I’m using a personal loan for a mortgage deposit?

Mortgage providers will assess your finances to see how risky you are to lend to.

Taking out a loan specifically to fund a house deposit will stick out like a sore thumb to your mortgage lender. You’ll be asked how you intend to pay the deposit and you must be truthful.

Your application will be seen as extremely high risk and even if you’re accepted for a mortgage, it will be expensive.

Your provider will also consider things like your salary and any committed expenditures, for example a mobile phone contract, or monthly car insurance payments.

Any debt that you have will be investigated, this includes any outstanding balance you may have on credit cards, loans or car finance. If you have demonstrated that you can make your payments on time and can pay off your debt responsibly, it may not count against you.

Your credit rating will also be taken into account. If you have a poor credit score, you’re unlikely to be accepted for a loan, never mind a mortgage. Your credit score can be affected by things like missed payments, rejected credit applications and going over your credit limit.

If you have previously taken out a payday loan, you’re unlikely to be accepted for a loan to fund a mortgage deposit.

How much deposit do I need?

Typically, your deposit will need to be between 10-20% of the house value.

A deposit of 20% or higher will give you access to better mortgage rates though.

There are 5% deposit mortgages available under the government’s mortgage guarantee scheme (running until December 2022), but they have higher interest rates than if you had a larger deposit, and you must meet certain criteria.

What's the average first-time buyer mortgage deposit?

According to the HM Land Registry, the average price of a home for a first-time buyer was £278,436 in March 2022 ^[2].

This would mean a 10% deposit of £27,843, or a 5% deposit of £13,921.

Speak to an expert before getting a loan for a mortgage deposit

It’s vital that you get financial advice before attempting to fund your mortgage deposit with a personal loan.

A financial adviser will be able to clearly explain how it would work, as well as the potential pitfalls. Taking out two large amounts of debt at the same time could have serious ramifications if you were to fall behind on your payments.

It’s important to think through all the potential scenarios, including what would happen if you lost your job or were unable to work due to illness.

You could end up losing your home.

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

Yes, but you may not have access to the best mortgage rates.

The mortgage provider will consider how much you have to pay off and look at your payment history to make sure you’re reliable with your repayments.

It’s always best to pay off any existing debt before applying for a mortgage.

Alternative ways to fund a mortgage deposit

There are a few different ways to fund a mortgage deposit apart from taking out a loan.

Borrowing money from family

Mortgage lenders usually permit money to be gifted from certain close family members for a deposit.

Most won’t allow you to have a loan from your family. In fact, your loved ones may have to sign an agreement which says that you’re not required to pay it back and that it has been gifted.

Guarantor mortgage

This should be considered as a last resort as it’s a risky financial product and they aren't widely available due to the risk they carry. 

Basically, someone is named on your mortgage as a guarantor, so if you default on your mortgage payments, they’re held financially responsible. The guarantor would become responsible for the mortgage payments if the borrower was unable to make the payments. In some cases one criteria could be that the guarantor's home is being used as a security deposit. 

Many mortgage providers offer springboard mortgage products which carry less of a risk and allow family members to support each other. 

Help to buy

The particulars of the Help to Buy scheme will depend on which part of the UK you live in, but it allows you to buy a home with a smaller deposit (from 5%) by providing you with a loan. For smaller 5% deposits you will need to meet certain criteria to be eligible. 

Shared ownership

You can buy a share of a home, between 10% and 75% of the home’s market value, and pay rent on the rest to your local housing association.

This is available to first-time buyers and all properties are leasehold. There is certain criteria that will need to be met. There are also restrictions on what you are allowed to do and not to do when you choose a shared ownership option. 

Saving up

It may take a while but putting money aside each month from your income might be a worthwhile option as you won’t have to take on any additional debt.

Try creating a budget to see where you can pinch money from in your daily spending to put in your deposit savings pot.