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Borrowing money for your first deposit

12th May 2022

By James Jones

When it comes to borrowing money for your first deposit on your mortgage, there are definitely several options to consider. Exploring all possibilities in regards to securing your first deposit could save you a massive headache. This especially applies to first-time buyers. This is because borrowing money as well as taking out a mortgage can add more unnecessary stress to your situation. 

Help from Family and Friends

The least stressful way of borrowing money to help with your first deposit would be to loan money from friends or family. However, this is only if you are NOT required to pay any money back to the significant other. If you don’t need to pay your friend or family member any of the money you owe, most lenders should accept your deposit. 

NOTE: You may require the loaner to sign paperwork stating that the loanee does not need to re-pay the loaner any of the granted sum. 

The only stipulation with borrowing money from family and friends is that some lenders may restrict who you can obtain money from as a deposit for a mortgage. For example, parents, grandparents and siblings are usually safe in this regard but close/family friends or more distant relatives may not be allowed to help out. 

Gifted Deposits

Gifted deposits involve money that is gifted to a new buyer, usually from a family member. Usually, gifted deposits are used for the partial or full deposit on a mortgage. They can also be used as a down payment for a new home as well. The main benefit of gifted deposits is that the greater your deposit, the lower your interest rate will be; thus granting you lower monthly mortgage payments. Gifted deposits are not classed as loans as they are gifted to the buyer without the intention of returning the money in the future. 

Mortgage lenders usually tend to prefer gifted deposits to new buyers from their close family members, such as parents or grandparents. This can be because more distant relatives or friends may be less willing to go through with the gift, therefore slowing the process down.

An alternative to receiving a gifted deposit is nominating a parent or grandparent as a guarantor so they can guarantee a mortgage payment each month if for some reason you are unable to pay.

Guarantors

If you are struggling to get mortgage offers with the current amount of money you have, there is always the possibility of naming someone as a guarantor. Guarantors are usually necessary when the borrower:

  • Either doesn’t have a credit score or their credit score is low 
  • Is on a low salary
  • Has recently started a new job

Ideal guarantors are people that you can trust. Most of the time a parent is the usual candidate for a guarantor, but close relatives are also a good option. The main prerequisite for a guarantor is that they are over the age of 21. As well as that, a good credit history and financial stability are key. If the guarantor in question is also a homeowner, it will add credibility to the particular application. and so make it easier for you to get the finance you need. 

Help to Buy Scheme for New Builds

Introduced in 2013, the Help to buy scheme is a good option if you already have some money saved up. The money saved up for the deposit should cover at least 5% and if you meet the relevant criteria you can receive help buying your own home. The criteria required for the scheme is:

  • You must be a first time buyer
  • The new build you are considering falls within the appropriate regional price cap

If you meet these criteria you can get help with an equity loan or the mortgage guarantee scheme. The equity loan provides an interest free loan equal to 20% of a new-build home’s value. Another initiative contained within help to buy is the mortgage guarantee scheme. With your 5% deposit, this scheme makes qualifying for mortgages much easier.

Help to Buy Scheme for Pre-Owned Homes

There is also a separate help to buy scheme for pre-owned homes. This incentive is a non-government backed scheme. Considering the 5% deposit that the buyer has already saved up towards their property, they could also borrow up to 25% to put towards the purchase price through a secured loan. 

Help to buy for pre-owned homes could be a cheaper alternative to the government scheme for new properties. It could offer a greater opportunity for the buyer to potentially find their ideal property through the possibility of being able to borrow more than a conventional mortgage.

Without a doubt the most sensible option when it comes to borrowing money for your first mortgage is making sure that your finances are on the right track. Having money equating to a 5% deposit doesn’t give you a massive choice when it comes to getting a mortgage. The more money you have for a deposit, the less it could cost you in the long run, especially in interest. This could lead to massive savings, as with greater choices; you are more likely to find a lower interest rate that could suit you.

If you’re unsure about the best option for you, talk to a Promise Money advisor today.



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