Can I Use a Personal Loan for a House Deposit?
Borrowing money for your mortgage deposit is sometimes allowed, but it’s likely to make it harder to get a mortgage and leave the best deals out of reach.
Using a personal loan for your mortgage deposit might seem a reasonable option. After all, raising a deposit can be tough, and a personal loan means you could get the money you need faster.
But dig deeper, and there are important downsides to getting a loan for a house deposit that it’s vital to consider first.
Read on to find out why borrowing money for a mortgage deposit using a personal loan has the potential to do you more harm than good, and the alternatives you might want to explore.
Can you use a personal loan for a mortgage deposit?
Some lenders are clear that they won’t give you a personal loan if you intend to use it for a mortgage deposit. However, it’s possible you could find others that might be willing to offer you a loan for a house deposit. And there may also be mortgage providers who would be willing to offer you a mortgage knowing that you’ve borrowed the money for your deposit in this way.
Crucially, however, just because you might be able to use a personal loan for a mortgage deposit doesn't necessarily mean that you should. In effect, if you’re buying a house by borrowing your deposit and getting a mortgage, the ownership of your home is based entirely on debt. This can prove highly risky to you and won’t usually be looked upon favourably by lenders.
How using a personal loan for a house deposit affects mortgage eligibility
The main problem with using a personal loan for a house deposit is that the debt you take on with the loan will need to be repaid at the same time as any mortgage you might be able to get.
This means you could struggle to meet the affordability checks carried out by lenders before they can offer you a mortgage. This, in turn, could make it difficult to get approval for a mortgage or mean you only qualify for higher interest rate deals.
If you already have other debt, perhaps on credit cards or car finance, this will be taken into account by lenders, along with your income, regular outgoings and credit score.
» COMPARE: Mortgages
How much deposit do I need to get a mortgage?
If you’re taking your first step on the property ladder, there are first-time buyer mortgages that you might be able to get with a deposit of 5% or 10% relative to the value of the property you are buying. However, the larger the deposit you can provide, the greater the number of mortgage options you’ll usually find.
It is also usually the case that the larger the deposit you can put down, the lower the interest rate you might be able to get. That’s because you’re borrowing less relative to the value of your house – or in other words borrowing at a lower loan-to-value (LTV) ratio – which makes you a less risky proposition to lenders. So, for example, if you are buying a property for £300,000 and have a 10% deposit of £30,000, then you will have a 90% LTV mortgage.
Borrowing money for your mortgage deposit
If using a personal loan for a house deposit doesn’t appear to be a good option for you, there might still be alternative ways to borrow the money you need.
Can you use a credit card for a mortgage deposit?
You could potentially use a credit card for a house deposit but, as with using a personal loan, it could make it more difficult to get a mortgage. This is because the debt you have on credit cards is taken into account alongside your other debt when a lender is working out whether you can afford the mortgage you want.
If you were to use your credit card for a mortgage deposit, and found a lender to offer you a mortgage, you’d need to pay off both at the same time. If you don’t have an interest-free deal on your credit card, or this period ends and your balance isn’t paid off, interest rates on credit cards can be notably higher than on other types of borrowing too.
Can you borrow money from your family for a house deposit?
If your family were willing and able to lend you the money for a deposit, you might be able to get a mortgage if the loan was formalised in some way. Typically, this would mean making clear the terms of the loan in writing, including the interest you would need to pay, and how much and for how long your repayments would be. That way, a lender could assess this loan in much the same way it would any other loan or debt you might have when it is calculating your affordability for a mortgage.
On the other hand, if your family is prepared to simply give you the money as a gift instead, there are no repayments for you to make, and it shouldn’t come into the equation when your affordability is being checked. Read more about gifted deposits just below.
Can a director’s loan be used for a house deposit?
If you own a business, you could potentially take out a director’s loan to use for a mortgage deposit. Essentially you’re borrowing money from your own company, although different lenders have different criteria that must be met.
It’s also crucial to understand the potential tax implications of utilising a director’s loan.
Alternatives to borrowing money for a house deposit
Generally it’s likely to be better to avoid borrowing for a mortgage deposit if you can, so that your new mortgage is the only additional debt you’re taking on. If you need help with your mortgage deposit, some of the alternatives to borrowing to raise the money that you need include:
Saving as much as you can
You’re almost certainly doing this already but you should make it your goal to put aside what you can each month. If you can cut back on certain non-essentials, perhaps take a second job or think of other ways to make money, you’ll hopefully see a money pot that starts to grow.
» MORE: How to save for a house deposit
A gifted deposit
A gifted deposit is where your parents or a close family member is willing to give you money for a deposit and doesn’t expect you to pay it back. If your family wants to help and are in the fortunate financial position that they can, this can be one of the quickest and easiest ways of raising a deposit.
Note that a lender usually wants to see a letter from whoever has gifted you the money to confirm that there are no strings attached to the money you’ve been given and that they have no interest in the property you are buying. It’s important to be aware of any potential implications for inheritance tax too. You should always seek professional tax advice if you are unsure.
» MORE: Gifted deposits explained
Shared ownership schemes
When buying through a shared ownership scheme, you purchase a certain stake in a property, instead of all of it. As you only typically need a deposit of between 5% and 10% calculated in line with the share that you’re buying, this can lower deposit requirements considerably.
» COMPARE: Shared ownership mortgages
Help to Buy scheme
Final applications for the Help to Buy equity scheme are closed to new applicants in Scotland and in England, but the scheme is still available in Wales until March 2023. Your 5% deposit could be boosted by 20% thanks to a government loan, which is interest-free for five years. The scheme only applies to certain new-build homes.
Instead of Help to Buy, in Northern Ireland you can apply for a Co-ownership shared equity scheme, where first-time buyers can co-own a new-build or existing property, or rent to own a new home, up to a maximum value of £190,000.
» MORE: The pros and cons of Help to Buy
With a guarantor mortgage, you’ll need a family member or close friend who is willing to act as your guarantor and step in to make your mortgage repayments if you don’t. This safety net for lenders takes away some of the concern they might have about you not paying back what you owe and may mean you’re able to get a mortgage with a low deposit. So it might even be possible to get a 100% mortgage with no deposit at all with a guarantor.
» MORE: 100% mortgages
To get a family mortgage, you’ll need relatives or friends who are willing to allow their savings to be used as security for a mortgage, potentially allowing you to buy without needing a deposit. And there are also family-assisted mortgages where you might need a deposit, but your family puts up their home, savings or a mixture of both to help you onto the property ladder.
» COMPARE: Mortgage rates
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Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more