Updated: April 12, 2023
Getting a Loan for a House Deposit
Thinking about getting a loan for a mortgage deposit? It can be done! Find out all the ways and exactly what you need to do next in our in-depth guide.
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Author: Pete Mugleston - Mortgage Expert, MD
Updated: March 10, 2022
Saving for a house deposit can take a long time. For some people it can take too long, particularly if the right property becomes available.
This is why using a loan to pay for your deposit is an option worth considering.
This guide will go through the types of loan that lenders accept for a house deposit, how they work, and what the eligibility requirements are for each of them.
Plus, we’ll look at where you can get more advice on the topic.
The following topics are covered below...
Can you get a loan for a house deposit?
Yes, possibly. But raising the deposit in this way makes everything a little harder, even if being able to make a larger deposit – say, 20% for example -would, in theory, give you access to better interest rates.
Since you’ll be responsible for paying back two loans lenders will have more stringent eligibility checks. They may actually even offer you less favourable rates or a lower mortgage amount overall.
It’s important to note that lenders rarely allow you to use a loan for the whole deposit, preferring you to be able to use savings to cover at least a portion of it.
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What type of loan can you use for a house deposit?
The main loans you might consider using to pay for a house deposit are:
- Personal loans
- Credit cards and overdrafts
- Family loan
- Director’s loan
The way these all work are a little different. Plus, lenders are more likely to accept some than others. So let’s look at them individually.
Using a personal loan
A personal loan is the simplest, and most obvious, option to consider for a house deposit. When lenders are assessing a mortgage application where a loan for the deposit is involved, there’s two key areas they’ll focus on.
Debt to income ratio
Lenders always look at your debt-to-income (DTI) ratio when they’re considering whether to offer you a mortgage. The more debt you have, the more concerned they’ll be about your ability to make your monthly repayments.
However if it looks as if you make enough to comfortably repay your mortgage and loan you’ve taken out to pay for the deposit, they may consider your application.
Each lender will take a different approach, but generally if your DTI ratio is somewhere between 20%-30%, then your chances of getting the approval you need should be high.
However, anything higher than 45% then you may struggle.
Work out your debt-to-income ratio by using our calculator below.
Debt to Income Ratio Calculator
You can use our debt-to-income (DTI) ratio calculator to work out how much of your income is going towards your fixed outgoings, expressed as a percentage. Based on that percentage, this tool will tell you whether mortgage lenders will class your DTI as low, medium or high.
Your Debt to Income Ratio is %
Good news! Most mortgage lenders will class your debt-to-income ratio as low. You’re unlikely to be declined for a mortgage based on your outgoings, but speaking to a mortgage broker before applying is still recommended as they can improve your chances of getting the best deal.
Most mortgage lenders will class your debt-to-income ratio as moderate, which means some of them might view your application with caution. Some lenders are much more strict than others when it comes to affordability and debt, so it’s important for you to find a lender who’s more lenient. You should speak to a mortgage broker before you apply to ensure you’re matched with a lender whose criteria you fit.
Most mortgage lenders will class your debt-to-income ratio as high. But that’s where we can help! With so much of your monthly income going towards debt repayments, you could struggle to get approved for a mortgage without the help of a mortgage broker. We can help you find a lender who’s more lenient on debt and affordability, and could still secure a mortgage approval.
Lenders always check your credit rating to see whether you can be trusted with loan repayments.
If you’ve been unable to put up a deposit they may want you to have a better credit rating than if you paid with your own savings. A history of defaulting on payments or other reasons for adverse credit will count against you.
Applying for a loan at the same time or just before you apply for a mortgage can have a knock on effect on your application.
Make sure you’re aware of your latest credit rating by checking your reports to see if it looks strong enough and if there are any steps you need to take to rectify any problems.
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Using a credit card or overdraft
Some lenders might allow you to use a credit card or overdraft to pay for your deposit. Again, they’ll check your debt to income ratio and credit rating for all of your finances, which will include how regularly you’ve been able to pay off your credit card.
Using one of these options to pay for your deposit will mean you’ll be paying interest on your credit card or overdraft as well as the mortgage, which can end up being very expensive in the long run. It could also use up your entire credit card or overdraft allowance, meaning you won’t be able to use it for your usual financial needs.
Can a family member give you a loan?
Yes, they can. Lenders attempt to treat family loan deposits in a similar way to personal loans, but tend to look on them a little more favourably.
This is because you might pay lower – or no – interest when borrowing from your nearest and dearest compared to the bank. This will give you a better standing in any affordability assessment. There’s also a level of trust associated with receiving such a large sum from a family member.
Lenders like there to be formal documentation drawn up between you and the person giving you the loan, including loan period, payment terms and any interest required.
They will also want to see what will happen to the money if one of the party dies, or the family member giving the loan urgently needs the money back.
Using a director’s loan
Business owners can potentially finance their deposit using money taken directly from their company. Be aware that some lenders might only accept this method of finance if you can prove you’re using money you put into the business to start with.
They’ll definitely want to make sure that removing this money won’t be detrimental to the business.
There are also a few types of tax that need to be paid on director’s loans:
- Corporation tax: Directors need to declare any loans they’ve taken from their company in their year-end accounts and on tax returns. These need to be paid back within nine months of the end of the company’s accounting period, or the company will have to pay extra Corporation Tax when the loan is finally repaid.
- Taxable benefits in kind (BIK): Any low interest (below 2.5%) or interest-free loan over £10,000 borrowed from your company is classed as a benefit in kind and must be declared on your tax returns
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How can a mortgage broker help you?
There are lots of different types of loans you can use to pay for a deposit. Each has different requirements, and whether lenders are likely to accept you for both loans depends on your individual circumstances.
A mortgage broker will be able to give you tailored, impartial advice and – since they know the market so well, they’ll know which lenders are more likely to accept your mortgage application if you’re using this method to fund your deposit.
If you get in touch we can arrange for a broker with experience arranging mortgages in these circumstances to contact you directly for a no-obligation chat to establish how they can help.
Other ways to build a deposit
In addition to the types of finance already outlined above, there’s a few other methods you can use to pay for your mortgage deposit, such as:
- Your pension: You can only use your pension to pay for a deposit if you have a Self-Invested Personal Pension (SIPP) and want to buy commercial property for a business you own. Lenders will want to know that you have a solid plan to pay the money back into your pension before you need it, and that your business is successful enough, since you’ll put the money you owe your pension at risk if your business fails.
- Equity in another property: If you already own another property, you can use the portion of that property that you actually own (the equity) to buy another. Unlocking this equity is called a cash out refinance. It allows you to take out a new, bigger loan to pay off your existing mortgage and use the rest to buy another property. This does mean bigger monthly repayments and more risk as you’re investing a lot in one type of asset.
Speak to a mortgage broker about using a loan to pay a deposit
So, there are even more ways to build a deposit if you don’t have the cash saved. How do you know which best fits your circumstances?
Our broker matching service will connect you with a broker who knows the most about the type of loan you’re using for your deposit, and which mortgage lenders respond most warmly to this type of loan.
If you give us a call on 0808 189 0463 or make an enquiry we will arrange for the right advisor to get in touch with you straight away.
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Mortgage Expert, MD
About the author
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!