With the average mortgage deposit at over £50,000 in 2021 according to Halifax research, gathering funds for a deposit can be a challenging task that takes years, especially when you're a first-time buyer saving to secure a mortgage and buy your first home. Noting this, you may ask whether it’s possible to take out a loan to cover your mortgage deposit.
It is doable, however taking on debt to secure more debt does come at a cost – you’ll have fewer options from lenders and may be restricted to higher interest rates. Your mortgage application could even be rejected altogether in certain cases. The various routes to securing a loan can make all the difference. Remember, lenders will always ask you for proof of the source of deposit for your mortgage.
The Topics Covered in this Article Are Listed Below:
Can I Fund My Mortgage Deposit with a Loan?
Some lenders may allow you to pay part of your deposit with an unsecured loan from a bank or building society.
However, you must demonstrate that your earnings can cover your monthly payments both for the loan and the mortgage plus the interest, then you may find a few lenders who are willing to take you on. You’ll need to provide details of the loan such as – the lender, amount, monthly repayment and term.
That said, you’re unlikely to be offered the best deal both in terms of interest rates and the amount lenders are prepared to offer. From the lender’s perspective, the application has significant risk – you’re effectively taking out a 100% mortgage on a property with 2 different loans.
Can I Pay My Deposit with a Credit Card?
It’s not possible to pay for your deposit in full with a credit card. Lenders typically ask that at least 5% of the mortgage deposit comes from your savings. With advice, you may be able to find a specialist lender who can offer a deal.
There’s likely to be a detailed assessment of both your credit history and your debt-to-income ratio to assess whether you can comfortably service all your debts. You’re also likely to face more limited options from lenders and less favourable terms.
Can I Use a Family Loan to Pay for a Deposit?
It’s common for parents to want help their children get on the property ladder.
Most lenders will allow first-time buyers to borrow money from a family member to pay for a mortgage deposit. Your parents lending you money and other family loans are viewed in the same way as standard loans – the lender must be assured that the borrower can meet their repayment obligations along with their other outgoings and the loan can’t cover the entirety of the deposit.
Family loans should be formalised through a written agreement. This should set out the terms, such the repayment plan and what happens in case someone dies or if there is a default on repayments. It must be signed by all parties.
Another option if you wish to rely on your parents or other relatives is to consider a family assist mortgage. This allows you to take out a mortgage of up to 100%. Instead of a deposit, your relative will put money in a linked interest-earning savings account with the lender, or have a charge put on their home on which they don’t make any payments. The risk here is that if neither you nor your relative can meet your monthly payments, they may lose their savings or have their home repossessed. "Family Springboard" mortgages are also an option.
Finally, using your parents’ home, they can remortgage their property to release equity and raise capital, gifting you the money to put towards a deposit for your new property. If they require that you repay them, you’ll need a formalised written agreement as explained above.
Can I Take Out a Director’s Loan to Pay for a Deposit?
If you own your own business, you could opt to use a director’s loan for your mortgage deposit. In this case, you’d borrow money from your own company to fund the down payment.
Different lenders will have their own views on director’s loans and eligibility requirements. For example, some may accept a director’s loan only if it equates to the level of your own initial investment in the company. Lenders will also want to see that this loan will not negatively affect business operations by eating into working capital.
There are also various tax implications associated with director’s loans that will require careful consideration from a business perspective - including Income Tax, Corporation Tax and benefits in kind. It’s best to speak to an accountant or tax adviser if this is something you want to consider.
Can I Fund a Mortgage Deposit with My Pension?
Pension funds cannot be used to contribute to residential mortgages. However, if your business needs to buy commercial property, it’s possible to use your pension funds for a mortgage deposit on the building. This option is available for those with a self-invested personal pension (SIPP), which has more flexibility than other forms of pension products.
You’ll also have to demonstrate how you'll repay the money you draw from your pension in future. Finally, you should be aware of the tax implications – you’ll have to pay tax on 75% of the amount borrowed at the marginal Income Tax rate.
Can I Use Existing Equity as a Deposit?
If you're looking to buy a second home or purchase a property to rent it out, you could consider releasing equity in your main residence by remortgaging the property and then using this money as a mortgage deposit. The first thing to assess is how much equity you have.
Let’s imagine your current property is worth £450,000 and your current mortgage balance is £200,000. This means you have £227,500 that could potentially be released as equity for a new mortgage deposit (up to 95% LTV).
Instead of remortgaging and using the released equity as a new mortgage deposit on a second home, another option you may want to consider is what’s known as cash-out refinance. In this case, you'd remortgage your existing property for a much large amount and then use this money to purchase your second property outright.
However, you may face higher monthly payments while taking on a greater risk in one form of investment category. You may be exposed to negative equity on a larger scale if the housing market slumps.
Releasing equity from your first home to buy a second home through mortgage refinancing has another aspect to consider. Many lenders cap the LTV (loan-to-value) ratio on second homes at 80% or 85%. Meanwhile, buy-to-let and holiday let properties are often capped at 75% LTV. You’d better be sure that you can cover the larger deposit you’ll need if you’re planning to use your second home for this purpose.
Can I Take Out a Bridging Loan?
Bridge financing is a type of short-term loan that developers, landlords and even house buyers can consider. A bridging loan would typically be for a smaller amount than a house mortgage. This type of finance works well for buying a house at auction and could even be used to raise a deposit. Bridging loans tend to be relatively quick to arrange, but one drawback to bear in mind is that they have higher interest rates than most first-time buyer mortgage deals.
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