Money News

First-time buyers warned against ‘backdoor 100% mortgages’

Taking out a loan to cover your deposit is a dangerous move - and the equivalent of getting a 100% mortgage - cautions mortgage expert.

A significant number of first-time buyers are planning to take out a loan to cover their deposit, according to research by Moneysupermarket.com.

16% of first-time house hunters say they are considering using a loan to cover the deposit, while 25% say they have already saved their deposit.

Louise Cuming, head of mortgages at Moneysupermarket.com warned that funding your deposit with a loan is a dangerous move.

“Anyone who takes a loan is effectively taking out a 100% mortgage through the back door,” she added.

Not only will the mortgage lender decline the application if it discovers a loan is the source of the deposit, but it is a big risk for the borrower, whose higher outgoings mean they are more likely to find themselves struggling with repayments.

The survey carried out among 18-34 year-olds found that 13% are considering stepping onto the property ladder for the first time in the next 12 months.

Taking out a loan to cover the deposit “must be avoided even if it means you have to delay buying your first home,” added Cuming.

Based on the current average house price, the average deposit of 25% for a first-time buyer is £32,000, which highlights what Cuming calls the “obsession with equity” that has gripped mortgages lenders over the last couple of years.

She said: “Lenders need to concentrate more on assessing the affordability of the mortgage on a case-by-case basis and less on the size of the deposit if they are serious about improving the mortgage market.”