Should I Borrow The Deposit to Buy a Property?
Getting on the property ladder is a dream many of us share.
No more Mr. or Mrs. Landlord, but our own home to live in, decorate, and do with what we wish.
However, with property prices rising in certain parts of the country, getting on the property ladder can be a dream that gets further and further away.
One of the main issues new want-to-be homeowners face is not getting a mortgage, but saving for the deposit.
Many people can qualify for a mortgage loan, they earn enough, and can afford the mortgage payments, but the majority of mortgage lenders want the borrowers to invest some of their own money in the property, in the form of a deposit.
Saving for a deposit on a property can take time, and can take a lot of money.
Many mortgage lenders want 10% or even 20% as a deposit on a property.
If you are seeking to buy a house or flat that is selling for £200,000, that means you can be required to have a deposit of £20,000 or even £40,000!
Saving £20,000 or more can prove difficult.
And mortgage lenders know this, so they have come up with some solutions as well.
Little or No Deposit Mortgages
Since saving up for a deposit is one of the great hurdles of getting on the property ladder, lender have looked at alternative ways to help those first-time buyers reach that first rung.
Things such as gifted equity, where a family member may sell a property for less than its current value, allowing the buyer to have a 10% or 20% stake in the property in the form of equity already.
There are also new mortgage loan programmes where a family member pledges 10% of the sale price of a property as a deposit, which means the borrower only needs a loan of 90% of the sale price.
The 10% pledged deposit is like an interest free loan, which has to be paid off in five (5) years. It is hoped that in that time the property will appreciate in value, and the buyer can re-mortgage into a new loan.
There are other variations on this loan theme, all involving a family member pledging equity in their own property as a deposit, and also being a co-owner of the new bought property.
Lloyds has expanded on this theme with their Lend a Hand Mortgage.
A buyer can get a mortgage for 100% of the sale price of a property if a family member opens an account and deposits 10% of the sale price in the account.
The new homeowner gets a mortgage loan for three (3) years at 2.99%, and the family member receives a 2.5% interest rate on the 10% they deposited in the account for the three years.
This not only gets the first-time buyer on the property ladder, but the family member who deposits the 10%, also gets a rate of return on their money.
Borrowing the Deposit For a Mortgage
One question that gets raised from time-to-time is, why not just borrow the deposit to buy a property and get a mortgage?
Take a personal loan for the 10% or 20%, and use the cash as a deposit.
There are a couple of schools of thought on this, and also a huge caveat.
The caveat is that with the high cost of property, if you needed £20,000 or more for a deposit, qualifying for such a large balance personal loan may prove difficult.
So that could stop the whole process there.
Secondly, many lenders do not like the idea of a borrowed deposit, and will not accept this and approve the mortgage loan.
There can be rare instances where a borrower may be able to show full affordability of both the personal loan for the deposit, and also the mortgage. But again, lenders like to see the deposit be saved, a gift from a family member, or using one of the alternative ways to buy a property with a little or minimal deposit.
The next question that comes up is, how will the mortgage company know?
There are ways they can find out, in addition, a question on a mortgage application may ask where the funds for the deposit originated from, how were they attained?
If they were borrowed, the loan can show on your credit history, thus prompting even more questions.
So in general, with all the alternative means available, and the fact mortgage lenders frown upon borrowing the deposit, it is not really an option, or make good financial sense to borrow a deposit to buy a property.