Personal Loan as a Deposit for a Mortgage

An Overview

Buying a home is one of the biggest investments a person can make. It requires a significant amount of money upfront which we refer to as the deposit. For many people, saving up enough money for a traditional mortgage deposit can be a challenging task. Some people are lucky enough to have family who can support with their deposit others face the challenge of being in rented accommodation who struggle to save enough to get them out of what is known as the “rental trap”

This is where a personal loan can come in handy as a deposit for a mortgage in England. It goes without saying this is not for everyone, in fact there is less than a handful of lenders who will even accept this as part of their standard criteria.

What is a Personal Loan?

A personal loan is a type of loan that is given to an individual for personal use. It normally used for things like home renovations, debt consolidation, or to purchase a vehicle. Personal loans are unsecured and are typically repayable over a fixed term such as 5 years.

How Does a Personal Loan Work as a Deposit for a Mortgage?

So how a lender will assess the ability of the loan to be used as a deposit is as follows. They will work the affordability based on that loan being a consistent outgoing through the term of the mortgage, it will be deducted from your affordability when working out what mortgage you can achieve just like and credit commitment would be on a normal mortgage application. The personal loan would be taken out to form the deposit, at this point you would know the monthly payment and the lender would need to approve your mortgage in principle with the loan in place to confirm they are happy you meet their affordability, criteria and credit score.

Why Use a Personal Loan as a Deposit for a Mortgage?

There are several benefits to using a personal loan as a deposit for a mortgage. The most obvious benefit is that it makes it easier for someone to get onto the property ladder, especially if they struggle to save enough money for a traditional mortgage deposit. Additionally, the time it takes to save up a deposit you could be paying rent, which could be at a higher rate tan you would pay for a mortgage. Whilst you are clearly able to save per month whilst renting it will take some time fore example to save up to £10,000. If it’s right for you and affordable to do so this could create a shortcut, for example, rather than paying rent at £500pcm and saving £500pcm towards a £10,000 deposit this would take 20 months. You will have paid £10,000 in rent, therefore £20,000 in total and you don’t own the property that you have been living in. flip that and say you pay a mortgage of £500pcm and a personal loan £200pcm for a £10,000 loan (presuming the overall interest over 5 years was £2000 (gross £12,000 t repay at £200pcm), you could argue that by owning your own home you are better off, the mortgage you are paying is reducing the capital of the mortgage each month you are receiving the benefits of the increase in the property’s value whilst having more disposable income. This is a very basic example of how it could work and there is a lot more that needs to go into the advice and theory of this example which the adviser will go through with you during the appointment.

What to Consider Before Using a Personal Loan as a Deposit for a Mortgage?

While using a personal loan as a deposit for a mortgage can be a useful tool, it’s important to consider several factors before making a decision. Firstly, it’s important to ensure that the reason for the loan is disclosed is properly and documented.

Secondly, it’s important to remember that personal loans typically have a higher interest rate than a mortgage. You need to understand the terms and specifics of the loan to ensure you are comfortable with the amount you will be paying back, for how long and what you will pay back in total.

Finally, it’s important to consider the impact that a personal loan may have on your credit score. This subsequently could have an impact on your ability to get a mortgage. You would need to demonstrate that you have been approved for the loan before applying for the mortgage. The funds would then need to be in your account and evidenced before the submission of the full mortgage application can take place and will be needed to be evidenced to the lender.

In conclusion, using a personal loan as a deposit for a mortgage can be a useful tool for those who struggle to save enough money for a traditional mortgage deposit. However, it’s important to carefully consider the terms and conditions of the loan and the impact it may have on your finances before making a decision.

We do not advise on personal loans and the example used above is for information only and any real personal loan would depend upon your personal circumstances. Not all providers will accept personal loans as a deposit and it’s not a decision to take lightly. You are recommended to speak to an adviser first who will be able to discuss this and other options with you.

We do not advise on personal loans and the example used above is for information only and any real personal loan would depend upon your personal circumstances.