Research by mortgage lender Halifax found that the average first-time mortgage deposit in 2021 was almost £53,935.
Given 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.
You may find lenders prepared to offer a personal loan that can act as a deposit for a house loan. You may also find a lender prepared to provide a mortgage on that basis. The problem is that they’re unlikely to offer you the best terms and interest rates because you’re effectively taking out a 100% mortgage, with the entire cost of the house being covered by one form of loan or another. That makes you high risk.
Lenders will scrutinize credit reports to establish how much risk you represent. They will pay particular interest to any missed repayments, payday loan applications and other indications that you may struggle to repay the overall debt. They will also look at any recent credit applications.
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.”
Using loans is frowned upon by mortgage lenders. You will need to tell them where your deposit is coming from; even if you don’t, they will discover the loan when reviewing your credit reports.
It's best to think creatively about how to get a deposit for a house rather than using loans.
The loan-to-value ratio (LTV) reflects the balance between the amount borrowed and your new home’s value. A low loan-to-value ratio is best because you are perceived as a low-risk borrower, meaning lenders compete for your business by offering attractive rates.
Conversely, those with lower deposits and a higher LTV are deemed to be at greater risk of defaulting on repayments.
Ideally, therefore, you want to put down as much as possible. But how much is enough?
First-time buyers usually require at least a 10% deposit, although some lenders offer mortgages with 5% deposits
Joint-mortgage applicants – who may be couples, friends or business partners – can usually get a mortgage worth up to four times their combined salaries. They typically need to put down at least a 20% deposit, although some lenders will accept 10%.
Other options worth contemplating include:
If a family member gives you the money for your deposit, you need to ensure you can prove that it is a gift, not a loan.
Also, be aware that under inheritance tax, the person giving you the cash must survive for seven years after making the gift; otherwise, you may have to pay inheritance tax on the money.
A shared ownership arrangement is where you opt to buy a proportion of a property – 25% or more – with a relatively small deposit. For example, 5% of the property value. You also get a favourable interest rate.
Under this scheme, you pay rent on the remainder of the property, at a below-market rate, to the housing association that co-owns the property. The idea is that you eventually buy the housing association’s share.
With the Help to Buy scheme, the government gives first-time buyers up to 20% of their deposit (40% in London), providing that they put up 5% themselves. Homebuyers must contribute 80% of the home’s price – for example, with a 5% deposit and a 75% mortgage. (In London, homebuyers must contribute at least 60% of the home’s value.)
This scheme is available to first-time buyers with a household income of less than £80,000 a year (£90,000 in London).
A guarantor mortgage requires a friend or relative to commit to step in and cover your mortgage if you fail to cover repayments.
It’s a big ask and entails a huge commitment from someone with no direct interest in the property. Still, it may be an option, providing both parties are willing to take on the risk.
LTV, or loan-to-value, is the size of mortgage compared to how much your property is worth. Do have enough equity to qualify for the best mortgage rates?Learn more