Property Buying Guide

Building a Deposit:Taking out a loan

One option may be to approach family or friends for a loan. If they agree to help, they may want you to pay interest. They may even give you a sum. Details of gifting a deposit and the tax and legal implications for donors can be found in our How Parents can Help section.

Another option is to take out a personal loan yourself. In some cases, for example in the case of a gifted deposit or a 100% mortgage, this loan can be paid off at the point of completion of the property so you do not continue to have it at the same time as your mortgage.  If you maintain a loan and also have a mortgage you would need to let your lenders know the situation. Get a quote for a personal loan.

It is possible that your parents may be able to get a peronal loan quite easily with which to help you, particularly if they are still working.  They could either lend money to you, as a first time buyer, or make a gift of the deposit to you. They can obtain a quote for a personal loan here.

You must consider the impact if you should find yourself unable to keep up repayments on a loan or any other long-term commitment associated with a house purchase.

Another consideration is that most lenders will also look at your disposable income when lending you money and will take into account your existing and intended loans. A few lenders may also look at 'lending you a deposit' as part of the overall mortgage package.

It is important to stress that if this is your situation, it is more important than ever that you take proper mortgage advice. It is imperative that you do not over-commit yourself, your home is at risk if you do not keep up repayments on your mortgage or any loan secured against it.

We have listed some other options for short-term loans below, but again you would need to be confident that you could afford these methods and be able pay them back when needed and on time.

You may decide to take out a personal loan to use as a deposit. A personal loan is one of the least complicated of the financial products available but you will need to be sure to understand the terms clearly before signing an agreement.

There are two types of personal loans offered by lenders such as banks and building societies:

A secured loan is one whereby the property is used as security on the loan and if you aren't able to pay off the loan according to the terms agreed with the lender, then your property may be at risk of repossession. As a first-time buyer this would  not be a relevant loan for you, but if a member of your family were to take out a secured loan to help you, he should be fully aware of the risks involved if he defaults on payments. A parent might want to obtain a quote for a secured loan.

An unsecured loan can vary in both size and the terms of the monthly repayments, depending on the purpose of the loan. It is a debt that is not secured against an asset or equity. But you must be aware that, as with any debt, if you fail to meet the terms of the loan, the debt can be recovered through court proceedings. An unsecured loan is paid on a monthly basis, usually at a fixed interest rate and over a fixed term. Sometimes an unsecured loan can be used to pay for a deposit, paying back the loan on house purchase. You might want to see how much a loan will cost by requesting a quote.

It's important that you use the Annual Percentage Rate (APR) to compare the true cost of borrowing, as this will factor in fees that might not be included in the 'headline' rate. A company may quote 'typical rates', which means that the terms apply to any applicant, but the exact rate offered to you will depend on your personal circumstances. If you have a poor credit history you may find it difficult to obtain a loan and if you are offered one, the interest rates may be high. Consider carefully before committing yourself.

You may find yourself in a position whereby you can pay off your loan early but beware - some agreements penalise you for doing this or for varying the amounts you pay. Be sure to check this out before signing on the dotted line.

Some lenders may offer you payment protection. You may also be offered other insurance products as part of a package. Check that you are not already covered, under, for instance, your employer's scheme (you might find you already have 'long term illness' cover, for example). You will probably find it cheaper to buy different financial products separately rather than in a package but again we stress that you should take financial advice to ensure that you have the correct products and protection for your circumstances.
 
Find out more about how to build a deposit - or even get away without needing one:

Savings l Extra work, selling things, cutting down on spending, cutting down on debt l Gifted Deposits l A loan l Investing Abroad l  Reducing the size of mortgage deposit needed l No Deposit Options