Getting the savings together for a mortgage deposit to buy a house can be an uphill battle against all the everyday running costs.
But is borrowing money or using a credit card towards a mortgage deposit an option?
If you are a first time buyer and keen to get on the property ladder, then you will need a sizeable chunk of cash for your mortgage deposit. Generally, you need a mortgage deposit of around 10% to 20% of the house’s value, sometimes more, depending on your income and credit score.
So, for example, if the house you wanted to buy was valued at £250,000, then most likely, you will need somewhere between £25,000 and £50,000.
In some cases, you may only need 5%, so for the above example, you could still get a mortgage with just £12,500, but again, this depends on what your income and credit rating is, as mortgage providers will only lend to those they are confident can keep up with the monthly repayments.
You would have access to the widest range and best mortgage deals if you have a mortgage deposit of around 40%, but if you’re looking for a loan for a house deposit, you are probably going to be after just enough cash for a 5% deposit.
Getting a loan for a mortgage deposit
When you apply for a mortgage you will be asked for proof of your income. On top of this, the mortgage provider will assess your financial capability.
They do this by doing a credit check on your financial history and looking over your monthly outgoings, bills and any outstanding debts you have.
Before you apply for any credit, you should evaluate your financial history and check your credit report.
If you have missed any payments in the past or you are not yet registered on the electoral roll at your address, then you are likely to have a hard time getting approved for a mortgage, or any type of credit for that matter.
Considering how much checking is involved in getting a mortgage, you need to be as prepared as possible before you even think about possibly taking a loan for a mortgage deposit.
Any loans you are currently paying off, especially any you have for a mortgage deposit, will be looked at by your potential mortgage provider when assessing your suitability. They will view it as an outstanding debt that you will be paying off alongside the mortgage they will be allowing you to borrow.
This means, that it’s unlikely you will be offered a mortgage if you decide to get a loan for your mortgage deposit.
Even if you choose to get a mortgage deposit loan just to cover a small portion of it, you are significantly reducing your chances of being approved for a mortgage.
Previously, you might have taken out a personal loan for a mortgage deposit or used a credit card to help pay towards a mortgage deposit, but with extra financial capability checks being taken by mortgage lenders, it is strongly recommended that you apply for a mortgage with as little outstanding debt as possible.
Mortgage deposit loan alternatives
There are a few alternatives to taking out a loan for a mortgage deposit, which could make it easier to raise the cash to buy a house.
But if you used a credit card to take on more of your living costs, then you could have more cash left in the bank at the end of each month, which you could put towards your savings.
Of course you would need to eventually pay back the debt on the credit card, but if you manage it correctly with the right credit card, you could find it much easier to save money and still pay back your debts.
If you are fortunate enough to have parents willing to lend you cash towards a mortgage deposit, you could ask them to ‘gift’ it to you.
Mortgage lenders generally do not like mortgage deposit loans, so they are more likely to accept your application if the money was given to you as a gift, with no obligation to pay it back.
Of course, should you manage to get the mortgage and start bringing in enough money to pay back the gift, then there wouldn’t be anything stopping you from doing so.
Alternatively, you could put together savings for a 5% deposit and get help to buy using a government house buying scheme. The two most popular options are Shared Ownership (also known as Part-Buy) and Help to Buy.
With Shared Ownership, you buy a portion of the property, so you wouldn’t need a mortgage to cover the full value of the home. You would only need a mortgage to cover the share of the property you are buying.
For example, if you are buying a 30% share in a home valued at £300,000, you would be paying £90,000. This means you could put up a 5% deposit of £4,500, and get a mortgage to cover the remaining share.
The remaining 70% would still be under ownership of the local housing association, but you would be given the option to increase your share in future. Your mortgage repayments would be much lower, but you would still have to pay rent on the share of the house you don’t own.
Help to Buy is a mortgage guarantee scheme, which essentially provides a safety net to banks and new homeowners when taking on a 90% or 95% mortgage.
While many banks would have been put off from lending a 95% mortgage to first time buyers, with Help to Buy, they have a guarantee in place, making it easier to be approved for a mortgage.
Before you consider taking out a loan for a mortgage deposit, explore all of your options, as it’s still unlikely that you will get approved for a mortgage with so much outstanding debt.
Read more…
- What size mortgage can I get? – Finding the right size of mortgage you can get before you start house hunting is a sensible move to help you set your budget.
- First-time buyers – Buying your first home can be both exciting and daunting, but thoroughly planning your finances can keep you on track.