Using A Loan For A House Deposit

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Owning your own home is considered to be a milestone for many, and the most traditional way of financing the deposit has been through savings. That being said, the economy today has put this out of reach for many, with rising property prices and more demanding mortgaging requirements. This has led to alternative methods of funding a residential purchase, such as taking out a loan for a house deposit. 

It’s possible to do this, but almost every source you find will tell you that it’s a bad idea, and for good reason. Nonetheless, we believe it’s best to be properly informed before entering into or dismissing the idea of using a loan to finance a house deposit.

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Understanding House/Mortgage Deposits

The fundamentals of a house/mortgage deposit are simple – it’s an upfront payment made by buyers to reserve a property and temporarily take it off the market. Generally, the deposit is around 5% and 20% of the house’s property value and demonstrates both commitment and financial stability to the seller. 

This is where the first rule of a mortgage deposit comes into play – how much you pay determines your monthly repayments. For instance, if you’re a first-time buyer, you may be allowed to pay a low deposit of 5% to secure the property. Conversely, you will almost certainly be paying higher interest rates. However, if you paid 20%, you would pay much lower interest rates. This is because the amount you pay for a housing deposit demonstrates the perceived level of risk to the lender. The size of the deposit put up against the house’s value is referred to as the loan-to-value ratio.

It’s important to understand this when considering paying for a housing deposit through a loan because you lose the advantage of having a possibly lower interest rate. This is because, in this scenario, there are two major loans with considerable interest at play. By reducing the interest by paying a large amount of the housing deposit, you incur a larger interest from the loan you’re using to pay it. This is provided that you use a standard option for lending. 

What Loans Do People Use For a House? 

Knowing the rules of a mortgage deposit modifies how you should approach using a loan to secure a property. But what kind of loans do people usually go for? 

Personal Loan

The overall value of personal loans in the UK has continued to increase, with an 8% increase from 2021 to 2022. A personal loan is classified as an “unsecured loan”, meaning it doesn’t require the borrower to put up collateral against the loan. This usually means credit scores are the main way to determine how reliably you can pay off the money you are borrowing. 

Using a personal loan for a mortgage deposit is considered to be a bad idea by many. The reason for this is that you’ll be paying off the heavy interest of two loans at once, and in a housing market that is most of the time getting more expensive by the year. It’s a very good possibility that the offer of paying the housing deposit with a personal loan will result in mortgage lenders rejecting you outright, as they consider it too big a risk. 

Secured Loans

A secured loan allows lenders to borrow money with much less risk by utilising collateral. The collateral is, of course, a high-value asset – such as a car or a property. Secured loans come with low interest as a result of the lessened perceived risk. 

Secured loans typically have a higher chance of succeeding than personal loans, though chances are still not the best. This is because, whilst the interest is low enough to be considered, sometimes the collateral is considered too high risk even for the lenders. For example – a vehicle. A vehicle is considered mandatory for a lot of people to get to and from work. The possible loss of the vehicle means work may be affected negatively, which in turn makes mortgage repayments harder. 

Family Loans

To take a family loan is to borrow money from a member of your family, and may or may not have repayment terms. Nonetheless, unless it’s specifically done through contract, these loans tend to be flexible due to the nature of familial relations. It’s done based on trust and love, not based on the probability of paying the loan back, which is essentially non-enforceable by law in this case. 

There is no reason whatsoever for mortgage lenders to decide against an application from someone borrowing money from a family. This is because there’s no enforceable action or existence of a competing loan with interest, many lenders consider this a safe option, provided it doesn’t come with an unfavourable contract. 

Guarantor Loans

A guarantor is someone who agrees to be responsible for repaying a loan if the main borrower defaults, essentially acting as a safety net for the lender. Upon signing the contract, the guarantor becomes legally obliged. 

These types of loans are not all that common in general, but they are often accepted by lenders provided the guarantor’s financial situation seems stable. Interest rates may be higher, however. It’s also a fact that borrowing capacity is enhanced, sometimes going up to 100% of the property’s value, potentially eliminating the need for a housing deposit. 

Pros and Cons of Using a Loan for a House Deposit

Using a loan for a mortgage deposit can have several advantages and drawbacks. 

Pros 

  • Increased Purchase Power – By getting a loan for a mortgage deposit, you may find that you can afford your dream home by making the deposit. Whether or not this also makes it more expensive for you depends on the type of loan, but acquiring a home that ticks all your boxes may be enough motivation to keep you steady. 
  • Quick Access to Funds – Having immediate access to funds is useful when considering a property due to the competitive nature of real estate markets. Being able to pay promptly is a gigantic advantage over others, who may require time to gather the funds. 

Cons

  • High-Interest Rates – Aside from a family loan, the other types of loans come with higher interest rates overall. This is not only because you’ll be paying back interest on the money you lent for the home deposit, but also the interest from the mortgage. These are likely to add up to cause issues. 
  • Mortgage Eligibility – Probably the biggest concern is most mortgage lenders outright denying you. If the money being lent incurs a high-interest rate, then they may consider the risk too great to chance. 
  • Higher Debt To Income Ratio – If much of your income goes to paying off debts, this will reduce your debt-to-income ratio. This can reduce your quality of life and prevent you from appropriately responding to an emergency. Debt-to-income ratio is one of the things most mortgage lenders look for, as many begin to look unfavourably upon a ratio higher than 50%.

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Our Suggestion

Here at When the Bank Says No, we would ordinarily advise against using a loan for a mortgage deposit. This is primarily due to all three cons in the section above. But just because we consider this course of action ill-advised in most instances, doesn’t mean there aren’t alternatives to making your housing dreams come true. There are some circumstances where it might be an appropriate course of action, especially if you have an expectation of an additional income source in the near future but need the deposit sooner. 

Our suggestion is to hire an expert mortgage broker who has the skills and connections to help you achieve solutions in the real estate market. Mortgage brokers make it their full-time job to understand mortgages inside and out. Contact us today and allow us to help you. 

Using a Loan for a House Deposit – FAQs

Can I Use a Credit Card for a House Deposit? 

It’s entirely possible to use a credit card to pay for a house deposit, but it’s not recommended. This is for much of the same reasons that a personal or secured loan may prove detrimental – they signal to most mortgage lenders that you may have difficulties making mortgage repayments. On top of this, there may be additional transaction fees/surcharges that will add to the overall cost. 

What Happens if the House Purchase Falls Through After Taking a Loan for the Deposit? 

If your house purchase falls through after taking a loan for a deposit, several things may happen: 

  • Mortgage Offer – If the house purchase falls through, the mortgage offer is likely now invalid. A mortgage lender may allow you to transfer the mortgage over to another property, but it’s also a good possibility that you’ll need to redo your application in its entirety. The most immediate thing you should do if the purchase falls through is speak to your mortgage lender as soon as possible. 
  • Deposit Refunding – Upon the house purchase falling through, you will get your deposit back. The only instances in which you won’t are the ones in which some terms say otherwise. 
  • Loan Repayment – It’s likely that unless you get your loan from family/friends, you will still be responsible for the loan repayments. This means you’ll be making monthly repayments as agreed upon, including the interest. 

Are there Government-backed Loans Specifically for House Deposits? 

There are several, yes: 

  • Mortgage Guarantee Scheme – Launched in April 2021, this scheme is designed to increase the supply of 5% deposit mortgages. It’s applicable for first-time buyers and current homeowners for properties under £600,000 and is available until June 2025. 
  • First Homes Scheme – Launched in June 2021, first-time buyers in England can apply and achieve a 30% discount against the market price of homes. The local authority determines eligibility criteria. 

How do lenders verify the source of the loan used for house deposits?

Lenders ask for evidence to tally up and make their determination about your ability to repay. There are several types of evidence they’ll ask for, confirming where your loan comes from. Bear in mind that we always recommend being honest with lenders, as it may result in consequences down the line. 

  • Bank Statements – Lenders will always ask for bank statements, seeing incoming and outgoing finances. If they see an incoming payment from a company, they can look that company up to find out the nature of the payment. 
  • Sale of Property – If selling an asset, they will require official documents demonstrating the sales. 
  • Legal Agreement – For money that is gifted, they will expect to see a legal agreement between you and the gifter.


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Cash deposits are usually not accepted due to difficulty in tracing.

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Emma Jones
Emma Jones
Emma began her career in Lloyds Banking Group, first in the unsecured & secured loans department at Halifax and later as a mortgage advisor at Lloyds. During 9 years in these roles and a further 2 years at Yorkshire Building Society, Emma was able to observe the impact of the recession, and how the banks let their customers down by denying loans and mortgages. Wanting to be a driving force for change, she stepped into a market advice role where she has been able to help clients when others couldn’t. Identifying a gap in the mortgage space, Emma went on to establish When the Bank Says No. As a keen property investor, she has been the focus of features in publications including The Sunday Times and This is Money. Emma’s greatest joy is overcoming the low expectations of their customers, many of whom have all but given up on getting a mortgage due. One thing Emma has learned through her own personal struggles is every client must be treated like a human and understood better by advisors and lenders in the industry. “We all have to navigate life events which can ultimately impact your financial status. It shouldn’t mean dreams of homeownership or business growth should have the breaks applied”. Emma and her team’s passion for helping people overcome the challenges they may face when applying for a mortgage have fuelled the success of When the Bank Says No.