The average UK house price reached a record high of £286,079 in April 2022, according to the Halifax House Price Index.
This means that even if you are aiming for a low deposit of 10%, you’ll need to fork out over £28,000 in personal savings. This isn’t spare change, and in a cost of living crisis, this can seem an impossible task.
Because of this, many are turning to other sources to fund their house deposit. Keep reading to find out if you can take out a loan for a house deposit.
What does it mean to get a loan for a house deposit?
Put simply, a mortgage deposit is the cash you’ll need to pay upfront when buying a house.
You’ll need to pay at least 5% of a property’s total value when you buy a house, but in the current climate it’s looking more like 15%. The larger a deposit you put down, the more of your property you’ll own and the smaller mortgage you’ll need to get to pay the rest of the house.
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: With a good credit score,you can take out a loan easily through your bank or building society for any reason. However, this will show up on your credit file, which a mortgage lender will check thoroughly before deciding whether to offer you a mortgage and, if so, on what terms. Many lenders are wary of deposits sourced from personal loans and will consider whether you can pay both the loan repayments and your mortgage.
- Director’s loan: This is an option forthose who are self-employed, operating through a limited company. If there’s money in the business, the company can lend money to the director — such as a loan for a mortgage deposit — which would then be repaid to the company.
- Borrowing from family: While it may sound simple, this option is far from. Your mortgage lender will want to know the source of the deposit and the funds will need to be accounted for.
- Credit cards: Maxing out credit cards is an alternative to a personal loan, but a risky one. This can attract a high rate of interest, which could see your payments skyrocket in the long run, making it difficult to make your mortgage payments.
The pros and cons of getting a loan for a house deposit
It’s possible to take out a loan to fund your mortgage deposit, but it’s not a decision to take lightly.
The pros are limited: you’ll be able to get on the property market quicker. If we consider that a 10% deposit for the average UK house is £28,000, it’s easy to understand why buyers are considering other approaches. But these approaches come with their own shortfalls. The cons of getting a loan for a house deposit include:
- Difficult to get a mortgage: If you’ve taken a personal loan for a property, it will be difficult to find a mortgage provider willing to lend to you. Mortgage lenders are thorough: they conduct affordability checks before making any offers to ensure that you can cover payments comfortably. They’ll be aware that you’ll be paying off two large debts simultaneously, and if they think that this could be at all difficult for you, they won’t make the offer.
- Higher interest rate: Even if you are offered a mortgage, it’s unlikely that it will have a competitive interest rate, so you’ll most likely end up paying a lot more in the long run. Lenders look favourably on those who can put down a deposit of 20% or more, with what is essentially a 0% deposit, you’ll be at the bottom of the ladder. although saving this is no easy task, especially if you’re currently renting.
- Financial implications: Mortgages typically last from 25-35 years: you’re making decisions for the long term, and you need to consider the worst case scenario. If you were to take a loan for your deposit, and be offered a mortgage with a less than stellar interest rate, could you still pay these bills if you had to take a period of time off of work? If the answer is no, you may need to reconsider.
The importance of getting independent advice
If you’re considering funding your mortgage deposit with a personal loan (or any loan), seek independent advice.
A financial adviser will be able to clearly explain whether it would be possible for you, viable for you, and what could happen if the worst case scenario did happen. Taking out two large amounts of debt at the same time could have serious ramifications if you were to fall behind on your payments.
Get independent advice to be safe in the knowledge that you’ve considered all possible routes before taking out a loan.
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