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Deposit for a house loan

Author: Myles Robinson - Expert Finance Advisor

Posted: May 15, 2022

Deposit for a house loan guide

It can be difficult, time-consuming and stressful to get a deposit together for a mortgage.

Many people contact us to find out if they are eligible for a mortgage deposit loan and their options. Our mortgage lenders will guide you in the right direction for your personal loan.

It is possible to get mortgages with a loan deposit. However, lenders will be more favourable if you have the cash you borrow.

What loan can you get to pay a mortgage deposit?

Yes, it is possible to have a loan for a mortgage. They will, however, consider your income and debt ratio. If there is evidence that you can afford both, a few mortgage lenders might consider your application.

A mortgage lender is more likely to approve those who have a 20% deposit or higher. However, this can be difficult if you rent. A higher deposit may give you better rates with lower mortgage payments.

If you’re looking to borrow money to pay for a mortgage deposit, then read on to learn about the loan options available to you.

How does a mortgage deposit loan affect my eligibility?

Your application’s acceptance rate may be affected by a variety of factors. You are less likely to be accepted if you have a history of adverse credit depending on the severity of the case.

Other types of loans you have can also be a factor. For example, a car loan may not pose a problem if the payments have been made on time. However, a payday loan user will likely have their mortgage application rejected if they intend to use a loan for all or part of their deposit.

It is important to understand that if you are approved for a mortgage using a bank deposit as a deposit, many lenders will view the investment as high-risk. They may offer lower rates, and higher mortgage repayments and may be less willing to lend you money, which could defeat the purpose.

If you have any questions about your application, make sure to contact a mortgage lender deposit specialist.

Use a credit card, overdraft or debit card to make a deposit

It is possible to use your overdraft or credit card for a mortgage deposit in certain cases, but this is considered a risky business.

It’s tempting to think that you can buy a house quickly without having to save for a deposit, but it’s not easy. Having a minimum deposit or a small deposit could help move things faster and offer you better mortgage rates.

Mortgage brokers will typically require that at least 5% of your deposit be made up of your savings account.

If you’re considering using a credit card to cover the entire deposit amount, it is unlikely you’ll be accepted for a mortgage loan.

Lenders will once again run the necessary checks and ask for a declaration about how the deposit was financed. This will allow them to determine where the money came from.

Lenders will assess your financial ability, just like with loans. They will look at your income to ratio as well as any outgoings.

You will have a limited number of lenders who are willing to lend you money. They may also limit the amount that you can borrow. Additionally, they might not offer the best interest rates on a mortgage.

However, specialist lenders may be available to help you. Contact us and we will help you locate them.

Use a family loan to make a deposit

Many first-time buyers rely upon the support of their parents or family member to get on the property ladder.

A parent or relative can help a first-time buyer obtain a mortgage by either providing an interest-free loan or an investment. The latter two options have tax implications.

A family loan is treated in the same way as a conventional loan. The lenders must be satisfied that the repayments can be afforded alongside any outgoings and any other factors like credit history or negative equity.

Family loans are still considered cautiously by lenders. This is due to the lower interest rates (positively impacting the affordability assessment and the trust instilled through family backing).

Individual or first time buyers will have a greater chance of being accepted (and a better rate of a mortgage) if they save some money for a house deposit.

For any family loan, lenders usually require that all parties sign a formal document. This document should outline the terms of the arrangement. It should include information about what will happen to the money in the event of one party’s death and what happens to the money if the lender requires it back.

It is highly recommended as family arrangements can be complicated and a contract will prevent conflicts if they change.

A director’s loan is required to deposit a mortgage.

A director’s loan can be used to finance a mortgage deposit if you are a business owner. This is an option with many lenders but each lender will have its own requirements.

A director loan may not be considered a source of finance by some lenders if repayments are made from funds you have invested in financing your business. Most lenders will also require evidence that the loan is not detrimental to the business’s continued operations.

Three types of taxes can also have significant implications.

  • Corporation Tax
    All outstanding loans to directors at the end of the year must be reported in the accounts as well as on the company tax return.
    If the loans are not repaid within nine months, the company will be liable for additional Corporation Tax. This will be repaid by HMRC to the company when the loan has been repaid.
    Consider when you will take out a loan for your business. This will allow you to get the most time before you have to repay it.
  • Income Tax
    The dividend income that falls within the higher rate tax band (over PS46.351 – PS150,000), is subject to 40% tax (although this can be mitigated by personal pension contributions).
    You can spread dividends over tax years by planning carefully the date at which the dividend will be payable.
  • Taxable Benefits in Kind
    Low-interest loans or interest-free loans exceeding PS10,000 will result in a taxable benefit in kind (BIK), in which you will be subject to tax on any interest that you have saved. If you pay 2.5% or more interest to the company, however, there is no BIK.

A director’s loan is expensive if you don’t plan your cash advances well. However, there are tax benefits if you’re smart about it.

The company is responsible for the tax liability on loans, while the tax liability on dividends is personal and is paid from the dividend.

For more information on mortgage options for limited company directors, please see our guide for mortgages for company officers.

Your pension can be used to fund a mortgage deposit

If their company needs cash quickly, some business owners turn to their pensions. The self-invested Personal Pension (SIPP ) is eligible for pension-led funding. This can only be used commercially and not in residential.

The most popular way to benefit from the scheme is to buy commercial real property using your pension cash.

Lenders are usually happy to allow you to use your pension funds to deposit a mortgage, provided that you don’t have any other financial factors to limit your financial ability.

It is important to have a plan for how you will save money to replace the lost money down the road. You also need to be confident about your business’s performance. Your future livelihood could be at risk if your business fails.

Tax implications are also possible. You will have to pay tax on three-quarters of the amount at your marginal income tax rates. You may also have to wait a while before receiving the refund as the tax that was deducted from your pension provider could be higher than what you owe.

Use existing equity to make a deposit

If you are looking to invest in a home or property to rent (BTL), then the most common method of creating a deposit is to release equity through a mortgage.

Your situation will determine which options are available to you. The first thing you should consider is how much equity your property has.

Equity is the difference between the amount you owe on your mortgage payment and the property’s actual market value. For example, if your home is valued at PS250,000, and you have a PS100,000.00 mortgage, then you have PS150,000 equity.

This allows you to unlock some equity by taking out a cash-out refinance. The new loan will pay off your existing mortgage, and the rest can be used for a home or investment.

If you have enough equity in your home, mortgage deposits can be a great way to invest in another property.

Lenders tend to offer better rates to people who invest with their home equity because they have more invested and less to lose.

You are increasing your monthly mortgage payment and increasing the chance of your primary residence being foreclosed by tapping into its equity. Also, you are investing a lot in one type of asset. No one knows what the future holds for the property market.

However, just because you have a large portion of your home doesn’t mean that you will be approved for a larger mortgage to help you finance a second. However, the more equity you have in your primary residence, the better. Individual circumstances like age or credit history will also be important.

Lenders will also assess your ability to pay the higher mortgage payments.

Consider the second property. While a standard residential mortgage has a maximum loan-to-value (LTV) of 95%, a maximum for BTLs is 85% and holiday let 75%. So, if you don’t intend to use the second property, you will need to make a larger initial investment.

Can I get a bridging loan?

Bridging financing is a type of short-term lending that developers, landlords and even house hunters are known to use.

These are ideal if you’re looking for a property to purchase at auction. In a pinch, you could also use them to raise a deposit.

They usually have higher interest rates than other forms, such as mortgages. However, they are more flexible and easier to arrange.

Talk to one of our expert brokers for advice about whether a bridge loan is right for you.

Talk to an expert about borrowing money for a mortgage deposit

There are many pitfalls that you should be aware of when borrowing a mortgage deposit. Your choice of lenders is limited which can lead to rejections or unfavourable interest rates. There are ways to lower your risk and make the odds work in your favour. Talk to a mortgage broker before you start.

Our network has mortgage advisors who specialize in helping customers with a loan deposit. We can match you with the right broker through our free broker-matching service. Talking to an expert broker will help you prepare for any issues you may face when borrowing a deposit. This will also increase your chances of getting approved for a mortgage.

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