There are many people who dream of becoming a homeowner one day. Aside from making sure that your finances are in order, you’ll also have to save up for a deposit. This is one of the struggles why a potential homeowner may take years to prepare before finally taking a chance at applying for a mortgage. With living expenses that seem to mount up year after year, having substantial savings enough to make a deposit can be difficult.
Often the next option considered is to borrow money for a deposit. Is this option risky? Yes, there are considerable risks involved that’s why there are a few things you need to know before going this route.
How Much do you Need for a Deposit?
After the housing market collapsed, mortgage borrow guidelines became stricter. This means that lenders will require that at least 5 or 10% deposit in reference to the value of the property is made by the loan applicant. It’s very uncommon these days to find a lender that allows a 100% mortgage. This type of mortgage used to be popular back then when the economy was still at its peak. You can borrow the full value of the home and won’t have to put in a deposit. Unfortunately, this is not considered anymore by many mortgage lenders.
While 5 or 10% may be good enough to get you approved for a loan, it’s still better if you can deposit a larger amount. Better interest rates are given when you have a bigger deposit. In addition to this, your monthly repayments will be a lot less, hence, will not be too much of a burden when factored in together with your other living expenses.
Is it Acceptable to Loan Money for a Deposit?
Obviously, a personal loan is another form of financial obligation. In general, a mortgage lender may look at a personal loan as another liability that will decrease your ability to pay off the mortgage. A lender will always look at your finances in detail as well as your spending habits.
You don’t need to be concerned with day-to-day expenses, but big decisions such as personal loans will indeed have an impact on whether or not you can borrow mortgage. This may not be the wisest option if you’re considering to fast-track your deposit.
If a personal loan will not work to your advantage when it comes to saving up for a mortgage deposit, what else can you do?
- Being frugal with your expenses is the safest way to save money without incurring further liability. Managing your finances well and improving your credit are all positive points that add up to your mortgage affordability rating.
- Borrowing money from family members is another option considered by many. However, not all lenders will consider this as a good source of deposit so check first if this is acceptable to the lender you’re planning to work with. The lender will also look into whether or not you’re under any obligation to pay off the loaned amount. They will also consider which family member loaned you the money. Parents and siblings are acceptable but other relatives may not.
- Another option is to get a guarantor for mortgage borrow application deposit. Getting a guarantor is slightly trickier because you need someone you trust and who also trusts you enough to lend you money.
- You can also look into the Help to Buy program. You’ll have to check if you qualify for the criteria to get help from the government in order to buy your own home.
While all these options are definitely suitable, it’s often best to hold of on your decision to buy a home until you are truly financially ready. A few years more of saving for a deposit can help greatly in making sure that when you are able to afford a mortgage, you don’t have any other financial liabilities as a result of doing so.