Saving up for a house is difficult.
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 amount is a house deposit
House deposits are usually at least 5% of a property’s total value when you buy a house.
But in the current climate it’s often closer to 15%.
And some buyers, such as first time buyers, may need a deposit of up to 20% of a property.
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.
Lenders advise against borrowing money for your deposit. But there’s no shortage of ways to obtain this money.
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
Cons
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 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.
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.
