Can I get a loan for a house deposit?

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 on 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, many won't.

Those mortgage lenders willing to accept a deposit made up of borrowed money often add caveats to that, such as the loan only being able to make up an 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, where you manage to find lenders willing to accept that you will be using a loan as a deposit, they’re unlikely to offer you the best terms and 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 the amount willing to offer you a mortgage. Those who are a bit more flexible will be looking for 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.