Research by mortgage lender Halifax found that the average first-time mortgage deposit in 2021 was almost £53,935. More recent mortgage statistics show that those saving for a 10% deposit on a property in 2022, would have likely had to raise an extra £1,800 between January and July just to keep up with rising house prices.
Given that it could take several years to scrape together this amount of cash, it’s tempting to take out a loan for a mortgage deposit. But putting yourself in debt to secure even more debt isn’t ideal - and mortgage lenders will be put off by high levels of borrowing.
There are loan providers who may be willing to lend to you when you intend to use the funds for a mortgage deposit. Equally, there are some mortgage lenders who will accept a loan for a house deposit when you come to take out a mortgage, however, most won't.
Those mortgage lenders willing to accept a deposit made up of borrowed money often add caveats, such as the loan only being able to make up a defined element of the deposit, not the whole thing. Others may be more likely to accept loans that have been taken out in the name of a business, rather than an individual.
The problem is, when you manage to find lenders willing to accept you using a loan as a deposit, they’re unlikely to offer you the best terms or interest rates. This is because the entire cost of the house being covered by one form of loan or another - which makes you high risk!
You can typically take out a mortgage with an outstanding loan, depending on your debt to income ratio and credit score. Most lenders are looking at a maximum debt to income ratio (typically around 50%) when they assess your suitability for a mortgage.
This means that even if they are happy to accept a loan for a house deposit, the size of the loan needed for most house deposits is significant, and may push you over their maximum debt to income ratio, especially if you have other debts as well. This is especially true if you have to borrow the whole amount.
Your credit file is always going to play a role in whether or not you are able to secure a mortgage, but if you're using a loan as a deposit, this will be even more important. When you're using a high percentage of the credit available to you, your credit score is affected, as credit referencing agencies award higher score those who stay within 50% of their available credit limit.
Mortgage lenders will be more cautious when you have a low credit score, and this alone could limit how many would be willing to offer you a mortgage. Those lenders that are a bit more flexible will be looking for an impeccable repayment history. If you have a history of missed, or even late payments, and you're taking out a large loan for a house deposit and an even larger mortgage, they will be concerned that you won't be able to manage such high levels of debt.
James Jones, head of consumer affairs at credit agency Experian, explains: “Most mortgage lenders take a dim view of applicants raising a deposit using other forms of credit. We certainly advise people to avoid applying for credit in the run-up to a mortgage application.”
It's therefore always best to think creatively about how to get a deposit for a house rather than using loans. If you must use a loan, try and combine this with savings or a gifted deposit from family. You could also consider using a guarantor mortgage, which may mean you don't need a deposit at all.
The lowest mortgage deposit that's currently acceptable to get a UK mortgage is 5%, however, not all lenders will be willing to lend at this level. It's also worth considering that some lenders will limit the LTV of your borrowing if you use a loan for your deposit.
The LTV (loan-to-value ratio) is the amount you need to borrow compared to the value of the home. For example, if you needed to borrow £95,000 to buy a £100,000 house, your LTV would be 95%. The other 5% would be your deposit.
Most lenders have a maximum LTV that they are willing to offer, which will be determined by your financial and personal circumstances. This means that even though there are 95% LTV mortgages available, you won't automatically qualify, you'll need to meet the lender's criteria for that level of borrowing.
Having a loan for a deposit is one thing that may cause lenders to limit the LTV of their borrowing, and a lower credit score (which you are more likely to have if you're borrowing a lot) is another. This means that it would not be the ideal scenario to get a 95% mortgage, but certainly not impossible.
The other thing to consider, however, is that the interest rates offered to you will be higher, the higher your LTV. This means that you will always be better off providing a larger deposit if possible, as this will also give you access to more competitive interest rates.
It's a good idea to speak to a broker before you take out a loan to pay for your mortgage deposit. They should be able to better advise you on the likelihood of finding a willing lender under these circumstances.
It's also possible that they could recommend other options for raising a deposit that you've not yet considered. Don't forget, they deal with mortgage applications on a daily basis, so if there's another path to home ownership available to you, they will be most likely to know what that is.
Taking out a loan for a house deposit is not ideal, but is possible if it's your only option. However, there are a range of other deposit types that you may want to consider, to avoid borrowing 100% of the cost of buying your home:
If a family member gives you the money for your deposit, you need to ensure that you can prove that it's a gift, not a loan. Most people providing a gift for this purpose will need to sign a declaration for the mortgage lender that confirms they will not seek repayment of the funds.
Also, it's important to be aware that under inheritance tax law, the person giving you the gift must survive for seven years after making the gift if you want to avoid potentially being liable for inheritance tax on the money.
A guarantor mortgage requires another person to provide a guarantee on your mortgage that they will cover the repayments, if you fail to do so. Usually this will be a close family member, such as a parent or grandparent, but there are lenders who also allow friends to perform this role.
It’s a big ask and a huge commitment from someone with no direct interest in the property, so the guarantor must be fully aware of the risk involved. In some cases, however, this would allow you to get a mortgage with no deposit.
If you're buying a new build property, there are sometimes incentives offered by the building company or housing group that have built the property, which are intended to help with the costs of the mortgage. This could be the vendor being willing to reduce the cost of the property by the deposit amount or them offering a cashback offer when you purchase.
Some lenders will accept either form of vendor contribution as or towards your deposit requirement, however, there may be a limit on the percentage of the value of the property that they are willing to accept from this source.
It's also worth noting that the LTV offered by the lender could be capped if you use this method of deposit payment. This means that although it could be a useful contribution, you may still need to make up the remainder of the deposit requirement with another source.
A shared ownership arrangement is where you opt to buy a proportion of a property – 10-75% with a deposit of a minimum of 5% of the property value. As you're saving up for a deposit on a percentage share, rather than the entire property, the requirement will be lower.
A home of £200,000 would have a minimum deposit of 5% - which is £10,000
A 10% share in a £200,000 would have a minimum deposit of 5% - which is £1,000
Under this scheme, you pay rent to the housing association that owns the remainder of your property, although this is charged at below-market rate. You are also able to increase your share in the home, as and when you can.
Although lenders advise against borrowing money for your deposit, there’s no shortage of ways to obtain the funds needed for a deposit if you can’t scrape together enough savings. These include:
Personal loan: You can take out a loan through your bank or building society for any reason. However, this will show up on your credit file, which a mortgage lender will check before deciding whether to grant you a mortgage and, if so, on what terms.
Director’s loan: Many self-employed people operate through personal service companies (also known as limited companies) and pay themselves by taking small salaries from the business and the rest in dividends. In a good year, they may choose to leave the money in the business rather than take it all out and lose it through taxation. In this case, one option is for the company to lend money to the director, including a loan for a mortgage deposit, which would then be repaid from future dividends.
Borrowing from family or friends: This option is far from straightforward. Again, your mortgage lender will want to know the source of the deposit. The problem with this type of loan is it’s not as strictly arranged as one organised through a financial company. Borrowing from family or friends can result in fractured relationships if either party becomes unhappy with the arrangement.
Maxing out credit cards is an alternative to personal loans, although it’s not without its shortfalls. The chances are that borrowing in this way will attract a high rate of interest, which could see your level of debt rocket in the long run, placing your mortgage repayments in jeopardy. It’s not ideal, but it may be an option if you are confident it will only be a short-term arrangement.
There’s no shortage of ways to save money for a mortgage deposit. Indeed, the list is probably endless. However, here are some of the easier ways to reach your goal:
Put aside a fixed amount every month, perhaps via a standing order. Take care not to overstretch, as you don’t want your good intentions to be cancelled out by overdraft charges
Cut out something you can do without. Even if it seems small, the cash can build up over time. Giving up smoking, takeaways, nights at the pub, or daily trips to a coffee shop can all make an impact
Take a second job, even if it’s just one or two shifts a week at a bar or a gym
Flat share with a friend who’s also looking to save. Alternatively, search for flat-shares online via sites such as SpareRoom
Sell items you no longer need via auction sites. Old vinyl, books and clothes are easy to part with
Reassess your financial options: Take time to look at whether you have the best savings account, current account, credit card, and switch if not. Likewise, don’t automatically renew your car and home contents insurance policies – shop around for better deals
If you’re eligible the Lifetime ISA which helps those under 40 to save towards the cost of buying a home, and is topped up by the government
Theoretically, yes, as this would essentially be a family gifted deposit in the eyes of most lenders. Your parents would need to repay the loan themselves, however, and would need to sign a declaration to confirm that this was indeed a gift and that you will not be expected to make any repayments to the loan company.
It's not an ideal situation, and it's a large amount of responsibility for your parents to take on, but if they are absolutely sure that the repayments will be affordable to them, it's certainly an option.
Yes, guarantor mortgages offer parents or other loved ones a way to help you buy a house. This type of arrangement can enable you to take out a 100% mortgage, as your guarantor’s home or savings are used as collateral instead of a deposit.
However, if you fail to make your monthly mortgage repayments, the mortgage lender could repossess the guarantor’s home. This is not a risk to be undertaken lightly, given what’s at stake.
Yes, some mortgage lenders will allow you to use a director's loan as a deposit for a house, however, this is more commonly accepted in commercial borrowing. There are a number of lenders who will consider this for residential home purchase, however, they will typically need evidence that this money has been drawn out of the business and that the director has paid any relevant tax liabilities.