Getting a deposit together for a mortgage can be a long and difficult process. Lots of people approach us wanting to know if they can take out a mortgage deposit loan, and what their options are.
The good news is that yes, it is possible to get a mortgage with a borrowed deposit, but how you acquire that cash can have a big impact on how favourably you’re looked at by lenders.
This article covers the following…
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Getting a personal loan for a mortgage deposit
Many lenders are wary of mortgage deposits sourced from loans and will be mindful of you repaying both a mortgage and repaying your debt. However, they will look at your debt-to-income ratio and consider your earnings alongside whatever you owe, and if there’s evidence to suggest that you can afford both, then a few lenders may consider your application.
Lenders tend to look favourably on those who can put down a deposit of 20% or more, although saving this is no easy task, especially if you’re currently renting. A larger deposit could give you access to better rates, so if you are looking to borrow money for a mortgage deposit, read on to find out what loan options for mortgage deposits are right for you.
What else affects eligibility if I’m using a loan for a mortgage deposit?
There are a number of other factors at play that may either increase or inhibit the likelihood of your application being accepted. For example, if you have a history of adverse credit, depending on the severity and recency of the instance, the less likely you are to be accepted.
The other types of loan you have are also a factor – for example, having a car on finance may not be a problem if you’ve kept up on the repayments, but something like a payday loan, even if it’s been paid off, on your record will ring alarm bells. Payday loan users are likely to have a mortgage application declined if they plan to use a loan to fund all, or even part of, their deposit.
If you are accepted for a mortgage using a bank loan as a deposit, it’s also worth knowing that many lenders will see the investment as high risk, and as well as being offered less favourable rates they may also considerably lower the amount they are prepared to lend you, which may defeat the purpose – so make sure you understand the terms before you commit.
Be sure to make an enquiry to speak with a mortgage deposit expert if you’re unsure about any aspect of your application.
Using a credit card or overdraft as a deposit
“Can I use a credit card for a mortgage deposit?”
In some cases it is possible to use your credit card or an overdraft for a mortgage deposit, but this is considered another risky business.
Although the prospect of buying a house without saving for a deposit may appear tempting as a means to get onto the ladder quickly, it’s not that simple.
Most lenders will require that a minimum of 5% of your deposit is made up by your own savings, so if you were considering using a credit card or overdraft for the full deposit amount you are very unlikely to be accepted.
Once again, lenders will carry out the relevant checks and will require a declaration of how your deposit has been financed, so they will be able to tell where the money has come from.
As with loans, lenders will also assess your financial capability by looking at your debt-to-income ratio and any other outgoings alongside the credit card repayments and mortgage.
Again, you will be limited in the number of lenders willing to offer you money, they may limit the amount you can borrow, and you will not be offered the best interest rates for a mortgage – not to mention the interest you’ll be racking up on your credit card or in overdraft fees.
That said, there may be specialist lenders out there who are willing to provide you with a lifeline, so get in touch and the advisors we work with will help you find them.
Using a family loan for a deposit
Many first time buyers rely on the bank of mum and dad for help getting onto the property ladder.
There are several ways a parent or family member can help a first time buyer get a mortgage, either through an interest-free loan, an investment, or as a gift (find out more on gifted deposits in our guide, but the latter two have tax implications.
A family loan is treated similarly to a conventional loan in that lenders must be happy that the repayments are affordable alongside the mortgage and other outgoings, and any other influencing factors such as credit history.
Although still regarded with some caution by many lenders, family loans are typically looked at slightly more favourably due to the typically lower interest rates (positively affecting the affordability assessment) and the level of trust instilled by family backing.
However, the individual will stand a better chance of acceptance (and better mortgage rates) if they contribute some of their own savings alongside the loan.
Lenders usually require a formal document of terms signed by all parties for any family loan. The document will need to state the terms of the arrangement, including but not limited to what will happen to the money if one of the party dies and what happens if the lender needs the money back, etc.
This is definitely recommended because family arrangements can be tricky and having a contract in place will help prevent conflict if circumstances change later down the line.
Taking out a directors loan for a deposit
If you’re a business owner you may consider taking out a director’s loan for a house deposit, which is where you finance your mortgage deposit using money from your own company. While this is certainly an option with many lenders, each will have their own criteria you need to meet.
For instance, some may only consider a director loan as a source of finance if it is repayment from funds that you yourself put into financing the business initially, and most lenders will want evidence that withdrawing this loan will not be detrimental to the business’s ongoing functions.
There are also three types of tax which can have considerable implications:
- Corporation Tax
Any loans to directors outstanding at your company’s year-end are required to be disclosed in the accounts and on the company tax return.
If they are not repaid within 9 months of the accounting period end, then the company will pay extra Corporation Tax, which will then be repayable to the company by HMRC when the loan is repaid to the company.
If you intend to take out a loan from your business then consider when you do it, so you can benefit from the maximum time allowed before repayment is due.
- Income Tax
Dividend income falling within the higher rate tax band (over £46,351 – £150,000) are taxed at 40% (although this can be mitigated if you make personal pension contributions, for example).
Again, careful planning of the exact date the dividend is payable can help you spread dividends across tax years.
- Taxable Benefits in Kind (BIK)
Any low interest / interest-free loans over £10,000 will result in a taxable Benefits in Kind (BIK), whereby you’ll be required to pay tax on the deemed value of any interest you’ve saved. However, there is no BIK if you pay interest to the company at 2.5% or above.
While a director’s loan can be costly if you don’t plan your cash advances properly, if you’re clever about it there can also be some tax advantages.
The tax liability on loans is payable by the company, whereas tax on dividends is a personal liability met from the dividend.
If you’re a limited company director and want to know more about your mortgage options, see our guide to mortgages for company directors for further information.
Funding a deposit with your pension
Some business owners look towards their pension if their firm needs a quick cash injection. Pension-led funding is an option available to those who have a self-invested personal pension (SIPP), and can only be used for commercial purposes, not residential.
One of the most popular ways to take advantage of the scheme is to purchase commercial property for the business using your pension cash.
While lenders are typically happy to let you use pension funds for a mortgage deposit (provided you have no other factors against you to affect your financial capability), it’s not a decision to make lightly.
You must have a concrete plan as to how you are going to save to replace this money further down the line, and be confident in your business’s performance, as the biggest risk surrounds your future livelihood if the business fails.
There are also tax implications, as you will be required to pay tax on three quarters of the amount of the sum at your marginal income tax rate. In addition, the tax deducted by the pension provider may be greater than the amount due and you may have to wait some time before you receive the refund.
Using existing equity as a deposit
Releasing equity via a remortgage, or using your current property as deposit for a mortgage, is a common way of generating a deposit if you’re looking to invest in a second home or buy to let (BTL).
The options available to you will depend on your situation, and the first thing to consider is how much equity you have in your current property.
Equity is the difference between what you owe on your mortgage and the property’s market value. If for example, your current home is worth £250,000 and you have a mortgage of £100,000, you have £150,000 in home equity.
You can therefore unlock some of this equity in what’s called a cash-out refinance, where you take out a new, bigger loan that pays off your existing mortgage and the remainder can be used for a second home, for instance.
Provided you own enough of your current home, mortgage deposits from equity can be an effective way to invest in a second property, as opposed to borrowing from other sources or taking out a separate mortgage on a second home.
What’s more, lenders tend to offer more favourable rates to those who invest using their own home’s equity because they have more invested in the game and a lot more to lose.
However, in tapping into your home’s equity you are increasing your monthly mortgage payments, as well as increasing the risk of losing your primary home to foreclosure. You’re also investing a lot of money into one type of asset, and no one can be certain what will happen on the property market in the future.
Of course, just because you own a chunk of your own home does not necessarily mean you’ll be accepted for a larger mortgage to also fund a second. The more equity you have in your primary home the better, but individual circumstances such as age and credit history are a factor as well.
Lenders will also assess your affordability to ensure you will be able to keep up with the larger mortgage repayments.
The second property type is also a consideration; while the maximum loan to value (LTV) on a standard residential mortgage is 95%, the maximum for a BTL is 85%, and holiday lets 75%, so bear in mind you’ll need far more initial investment if the second property isn’t for your own use.
If you’re still unsure whether using equity from another property you own is a viable option for amassing a mortgage deposit, get in touch and the advisors we work with will offer expert insight and pair you with the right broker, should you choose to push ahead.
Can I take out a bridging loan?
Bridging finance is a form of short term lending that landlords, developers and even house hunters have been known to turn to.
They are perfect if you’re looking to buy a property at auction or, at a pinch, they could be used to raise a deposit.
The downside is that they usually come with higher interest rates than other forms of lending such as mortgages, but are often more flexible and far quicker to arrange.
For the right advice on whether a bridging loan would suit your needs, talk to one of the expert brokers we work with.
Speak to an expert about borrowing for a mortgage deposit
If you have any questions or you’d like further advice on borrowing money or using a loan for a mortgage deposit, call Online Mortgage Advisor on 0808 189 2301 or make an enquiry online.
Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. We don’t charge a fee, and there’s no obligation or marks on your credit rating.