What to know before using a personal loan as a house deposit

Can I use a loan as a deposit for a house? 

Whilst saving for a deposit would always be preferable, we understand it isn’t always possible or can take many years at best.

Rents at record highs and rising house prices are making it increasingly difficult for many aspiring buyers to save enough for a meaningful deposit.

Last year the average first-time buyer deposit in the UK was a whopping £53,935. That figure will no doubt continue to rise, so by the time you’ve actually managed to save that amount, the goalposts will likely have moved.

So, is there a way to fast-track saving for a deposit?

In short, yes; it’s possible to use a personal loan as a deposit for a house, but not many lenders accept this, and you will have a much wider range of options if you fund your deposit from other sources.

How does using a personal loan for a deposit for a house work?

You will need to consider the monthly costs for both the mortgage and the personal loan, the mortgage provider will also take into account both these payments when assessing your affordability.

Before applying for a loan, it’s worth checking with a mortgage broker like Strive about what impact any future loan payments may have on your affordability. They will also check if you qualify for the lenders that consider deposits funded by personal loans. The last thing you want to do is take out a loan only to realise you can’t get a mortgage.

It’s worth mentioning that most mortgage lenders consider the monthly payment of the loan rather than the outstanding balance when assessing affordability.

Personal loans are generally available over terms of 1-7 years. Whilst taking a loan over a shorter term will ensure you pay less interest overall, a shorter loan term with a higher monthly payment will have a bigger impact on your mortgage affordability compared to one spread over a longer period.

For example, a £10,000 personal loan spread over 7-year term at 5% would be £141 per month compared to £300 over 3 years. This could make a big difference to the amount you can borrow on a mortgage.

Most mortgage lender criteria state that the personal loan must be taken with a separate company from the mortgage provider. The maximum amount you can usually borrow on a personal loan is £25,000, although the amount you can borrow will depend on your affordability and credit score.

The minimum deposit for a mortgage is 5% of the property value, however the deposit required will depend on the lender’s criteria and your own deposit. You could use the personal loan to fund some or all of your deposit.

Is using a loan for a deposit a good idea?

This depends on your own circumstances and the options available to you. You will need to calculate the total costs of the mortgage and loan payments and compare them to what you are currently paying in rent and saving for a deposit.

For example, if your rent is £1,000 per month and you are saving £300 a month for a deposit, your total outlay is £1,300 per month. Let’s assume the mortgage was £900 and the loan £250 per month, you would be £150 per month better off each month.

How the total costs compare will of course, depend on your deposit level, mortgage term, interest rates and current level of outgoings.

Even if the costs of the mortgage & loan are higher than your current outgoings, you may still decide buying is the right option because you will own a property and be chipping away at your own mortgage instead of paying your landlord’s mortgage off.

If for example, it would take you 5 years to save for a deposit, consider what you could have done in that period had you bought sooner, effectively fast-tracking the process with a personal loan.

You could benefit from house price rises or, at the very least, build up some equity in your home with 5 years of mortgage repayments. Remember, a personal loan will also be cleared significantly quicker than a mortgage; therefore, you’ll potentially be clearing your overall debt quicker than you would have done otherwise.

If you’re concerned about having monthly payments on a mortgage and a personal loan, you could consider borrowing on the mortgage over a longer term initially and reducing later once your loan is cleared, or you feel you can afford to.

Another way to look at it would be that you wouldn’t buy a property if you had a loan for a car in place at the time of application. Lots of people have high levels of unsecured debts, loans, credit cards, and cars on finance when applying for a mortgage. If you’ve not got much in the way of outgoings, why not utilise this?

Using a personal loan to top up my deposit for a house

You can use a personal loan to fund some of your deposit for a house, it doesn’t necessarily need to be for the full amount.

There are several reasons why this may be advantageous, summarised below;

Loan to Value

Interest rates are based on risk, and usually, the bigger deposit you put down, the cheaper the interest rate. This is usually in increments of 5%, for example, an interest rate on a mortgage with a 10% deposit may be higher than one with a 15% deposit.

If you’re on the cusp of a Loan to value threshold and it makes a significant difference in the interest rate and you are taking a fixed rate over a lengthy period of time, it may be cheaper overall to borrow and top up your deposit. You could be saving interest on a vast sum of money for borrowing a comparatively low amount on a personal loan.

The loan to value can also impact how much a lender will consider lending you, for example, with a 5% deposit, most lenders will only consider 4.5 times your income, however with 10-15% deposit, you may be able to borrow 4.75-5.5 times your earnings, depending on the level of your income. Topping up your deposit lightly could completely change the options available to you.

Purchase price restricted by your deposit

For many customers, the amount they can borrow is limited by their earnings, and for some, it’s the deposit.

Let’s take a customer on £100,000 per year of young age, with no credit commitments or dependents and assume that subject to having the required deposit, he could borrow 4.5 times his income. He wants to purchase with a minimum deposit but only has £30,000 currently.

His income may allow him to borrow £450,000, however, he is limited to a £300,000 purchase price because his £30,000 represents 10% of the purchase price. In reality, if he had £31,000, he could purchase at £310,000 or if he had £35,000, he purchase at £350,000 or £450,000 with a £45,000 deposit.

In the grand scheme of thing, an extra £10,000 is minimal compared to the overall sums involved and could mean they could buy a vastly different property type.

Moving home isn’t cheap; the average cost of moving home in the UK is around £12,000 or £16,000 in some parts in the south of England, buying the right home, albeit if slightly more expensive, can save you far more in the long run.

For example, if you bought at £300,000 because that’s all your budget allowed at the time, and in 18 months move to a £450,0000 property that you could have otherwise afforded in the first place if you had the extra deposit, you’ll likely spend around £15,000 in stamp duty and moving costs, which would be more than you borrowed on the loan.

The same can also be possible with a buy-to-let mortgage, this needn’t be just via funding via a personal loan but generally. If your mortgage lender requires you to have a 25% deposit for Buy to Let and you have £50,000, this enables you to purchase at £200,000, if you have £55,000 you may be able to purchase at £220,000. A comparatively small amount makes a big difference and could mean you get the right property in the right area with potentially better tenants and higher rent.

Can I use a credit card for a deposit on a mortgage?

Most mortgage lenders don’t let you use the funds from a credit card to fund your deposit. However, you could use a card to pay some of your purchase expenses, so long as the lender is aware and comfortable with the future additional borrowing.

You could, however make use of your credit cards, and if you spent on a credit card for a few months instead of your bank account, your savings would naturally build up, whilst, of course, your credit card balance would increase.

In the example above, where a customer could increase their purchase price by effectively £10,000 for every £1,000 extra deposit they put down, this could be worth considering. Assuming you can still borrow the amount you need with any additional credit card balances factored in

What alternatives are there to using a loan for a deposit for a house?

The most obvious solution would be to save for your deposit; however, this is usually the most drawn-out option. Alternatively, most lenders consider gifted deposits from family members or sometimes friends.

Mortgages are available with as little as 5% deposits, and if you bought a shared ownership property, you can put down as little as 5% of your share of the property value instead of the full market value.

How Can Strive Mortgages help?

It’s always worth speaking to a mortgage broker when exploring your mortgage options, but even more so if you’re considering using a personal loan to fund your deposit. At Strive, we have experience arranging mortgages for customers using personal loans as a deposit. Therefore having a broker like us working with you will give you the best chance of success with your application, so get in touch with us today.

For more information on using personal loans as a deposit, please contact a member of the Strive team, by emailing info@strivemortgages.co.uk or call us on 01273 002697.

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