Ask Our Expert

Loan for mortgage deposit - Ask our expert

Dear Chris, my partner and I want to buy our first house and want to do it now, before house prices start going up again.

We have saved up a couple of grand but have been told we’ll need a much bigger deposit to get a mortgage deal.

Should we take out a loan to boost our deposit?

Best wishes,

Serene, via email Tuesday 6 October, 2009

On the subject of taking out a loan to boost your mortgage deposit, our expert says...

Dear Serene,

Thanks for getting in touch. The idea of taking out a loan to boost a mortgage deposit is one that has tempted many first-time buyers.

Indeed, in July this year, 16% of first-time house hunters said they were considering using a loan to cover their deposit, according to research by Moneysupermarket.com.

However, experts have warned that this is a dangerous move. In fact, it is tantamount to taking out a 100% mortgage – a product that isn’t available to house purchasers at the moment, for very good reasons.

Taking out a loan to fund a mortgage deposit is a big risk, as you will have to meet both your mortgage and loan repayments each month. These higher outgoings mean you are more likely to find yourself struggling with repayments.

Over committing yourself like this is dangerous as if you fall behind on your mortgage repayments, your home may be repossessed.

Furthermore, as the deposit you put down is borrowed cash, you yourself will have very little equity in the house and will be in danger of falling into negative equity, if house prices fall.

Even if you decided this risk was worth taking, there are two crucial problems you will face if you attempt to take out a loan to fund your mortgage deposit:

When taking out a loan, you will have to state its purpose. It’s very unlikely that you will be able to find a loan provider that will approve you for a loan to fund a mortgage deposit.
When taking out a mortgage, you will usually have to state the source of your deposit. It’s unlikely that any mortgage lender will approve you for a mortgage if the source of your deposit is a loan. Even if you don’t have to state the source of your deposit, mortgage lenders conduct extensive affordability assessments these days, and if you are already making large loan repayments each month, this will count against you.

To clarify, taking out a loan to fund a mortgage deposit will almost always be a very bad idea. It would be a much better idea to concentrate your energy of cutting your outgoings now, saving as much as you can, and waiting until you have a sufficient deposit to get on the property ladder.

There is no guarantee that house prices will increase dramatically in the near future, and besides, it’s more important to decide when is the right time to buy for you based on your personal situation, rather than try to time the market.

For advice tailored to your specific circumstances, we would recommend that you contact an independent financial adviser or whole-of-market mortgage broker.