Saving up a deposit for your first property is tough and it takes time. Read this article to find out whether loan products can help you get there, which mortgage lenders will accept them, and how they could affect your credit rating.
With house prices increasing, the amount first time buyers need to put down as a deposit is also affected (in 2019 the average deposit amount was £46,187 nationwide and over £100k in central London). Some first time buyers are able to accumulate this figure through inheritance, high income, or reduced living costs. Others - particularly solo buyers - will struggle to reach this figure. In fact, lack of deposit savings is one of the biggest blockers for first time buyers. Is there a loan solution to this problem, that still allows first time buyers to own their new home outright?
Let’s take a look at the amount you actually need for a deposit
You will need to contribute at least some of the deposit from your own savings to be able to access a mortgage. Due to the large gap between house prices and wages, more and more lenders are providing mortgages to buyers who have saved up just 5% of the house price.
Think about the property you’re aiming to buy, and what that means for the deposit you need in total. If you have less than 5% or want to qualify for a better mortgage interest rate, you may be considering some of the options below.
Personal loan - not usually accepted
Most money advice websites will say no. All loans connected with your credit record will be visible to your mortgage lender, and outstanding debts reduce the amount that they would be willing to lend. Personal loans are usually repaid over a relatively short period of time so their total monthly payments are high: they include capital repayment as well as interest payments.
Lenders are obliged to consider your overall debt-to-income ratio as well as other affordability considerations. If your total debt is high and they question your ability to pay off the loan, you might have problems accessing the mortgage you want. In the event that you have a sufficiently high income and they decide you can afford both, still only selected lenders will consider the mortgage application.
Credit cards and overdrafts - also not usually accepted for a deposit
Another form of personal loan, combining credit cards and overdrafts together seem like an appealing way to help you afford the deposit you need - but most lenders stipulate in their conditions that you must have a cash deposit for at least 5% of the property price. In addition, credit cards and overdrafts tend to have very high monthly interest rates. The associated monthly payments would most likely prevent the lender from offering the full mortgage amount. Some buyers may find a lender that will allow them to top their 5% up with credit cards and overdrafts - but again, your financial circumstances will be affected and you may be rejected for the loan.
Director’s loan - applies only to select business owners
If you own a business, it may be possible that it can finance your deposit in the form of a director’s loan. Again, this is subject to strict lending criteria. If withdrawing the loan from the business could be detrimental to the business’s future or current operations, it is unlikely that this form of loan would be accepted as a deposit.
Equity loan- available to many first time buyers
An equity loan is a form of lending that can boost your deposit, and can be accepted by mortgage providers.
Equity loans are linked to the value of the property (see our guide to equity loans and how they work). In the event of a default, the second charge lender would enforce their legal charge on the property and sell the home to get repaid, but only after the first charge lender has recouped their sum.
Equity loans are more likely to be accepted by lenders than other types of loans because:
- A qualified mortgage adviser will advise on suitability and check your affordability and any impacts that an equity loan or a second charge mortgage could have on your financial circumstances
- Equity loan providers must have their product approved by the mortgage providers that lend alongside them
- Second charge mortgage loans are regulated to the same high level as regular mortgages, which reassures lenders
Second charge mortgages are also common for current homeowners, who use them for various financing purposes. As a tightly regulated financial product, you can only apply for this type of lending via an advised sale route using an authorised mortgage broker and not directly to the lender.
Where can I find an equity loan available to first time buyers?
Currently first time buyers in England and Wales have two main options:
Government Help To Buy Equity Loan
Available for selected new build developments.
Available on existing and new homes across the country.
Both have the following advantages:
- Increasing your effective deposit, giving you access to lower interest rates on your main mortgage
- Increasing your overall monthly affordability, allowing you to afford a better home sooner
- Flexibility on when you repay the loan
- You are the full owner of the home
But they also have some disadvantages:
- If the property value goes up, you’ll have to pay back more than you borrowed in the first place
- You’ll need to plan ahead on when and how to pay back the loan - this may mean remortgaging or selling the home at a later date
- Interest rates may be higher than on the main mortgage (though as the equity loan amount is typically smaller, the overall cost of the interest is less)
But isn’t all debt bad debt? I should be avoiding extra debt at all costs!
Everyone is different, and we recommend getting professional advice from a mortgage broker to help you work out the best solution for your own circumstances.
If you’d rather stay put and save up for a deposit than take out a second loan, think about how much you’ll be spending on rent while you save.
If it’s higher than the interest you’d be paying on an equity loan, you might want to seek advice to see if a loan is a viable option.
Good debt is an investment that can grow in value or generate long-term income. Bad debt is used to buy things that quickly lose value and do not generate income. Bad debt also carries a high interest rate, which can spiral if left unpaid.
All regulated mortgage loans must be sold through a qualified financial adviser to ensure that customers take sensible decisions and will be in a strong position to manage and benefit from loans secured on their home.