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What Is a Leveraged Loan?

Leverage and gearing are strategies involving borrowed money to maximize returns in property investment. Leverage is commonly achieved through buy-to-let mortgages. Two examples illustrate the concept.

In the first scenario, no leverage is involved. With £200,000 in cash, you buy a property worth £200,000 outright. Benefits include no mortgage, full rental income, minimal costs, and lower risk.

In the second scenario, leverage is used. You split £200,000 into four equal portions (£50,000 each) and purchase four £200,000 properties with 75% loan-to-value mortgages.

Each property requires a £50,000 deposit and a £150,000 mortgage. Although there are additional costs, we simplify for clarity. All four properties generate rental income, but mortgage payments are necessary.

Over time, property prices rise by 25%. In the first scenario, your property’s value increases from £200,000 to £250,000, yielding a 25% return.

In the second scenario, all four properties also rise to £250,000, resulting in a £50,000 profit per property, totaling £200,000 profit. Leveraging the initial £200,000 investment delivers a 100% return, doubling the return compared to the unleveraged example.

Property investors embrace leverage for its wealth-building potential over the long term. While mortgages are debts, leveraging can significantly boost returns.

Why are the majority of investors happy to take on the debt?

Debt can be categorized into good and bad types. Bad debt, like credit card borrowing for depreciating items or short-lived experiences, is generally unfavorable due to high-interest rates and no lasting value.

In contrast, mortgage debt is considered good debt because it’s a deliberate investment in an income-generating asset. Unlike credit card debt, mortgage debt offers structured, affordable interest rates over a long term, with options for fixed payments.

Viewing mortgage debt as buying power rather than a burden is key. It amplifies your buying capacity and enhances your return on investment (ROI). Essentially, it allows you to leverage your own money with the lender’s funds. While it may initially impact profits due to interest payments, over the long term, capital growth results in a higher ROI.

Can you get a loan for a mortgage deposit?

Wondering if you can secure a loan for a mortgage deposit? Yes, it’s possible. If you’ve saved a small deposit (around 5% of the property value), some lenders may offer you an equity loan of up to 25% of the property value, which you can use toward your deposit. However, there are pros and cons to consider. While it can improve your mortgage rate, only a few lenders entertain such applications, and there are associated fees and potentially high interest rates.

Alternatively, you can explore using an unsecured loan to boost your deposit. This option is limited, as most lenders prefer to be your primary debtor. But if you have minimal other debts and sufficient income to cover both the loan repayments and your mortgage, it’s a possibility worth exploring.

Do I need to tell my lender that my deposit is a loan?

When it comes to your cash deposit for a mortgage:

1. Source Verification: Both your solicitor and mortgage lender will inquire about the origin of your cash deposit. They may request evidence, including bank and savings account records, to confirm how the funds were accumulated. It’s crucial that the source is non-repayable, such as personal savings or a gift from parents.

2. Affordability Checks: Banks are legally required to conduct comprehensive affordability assessments and credit checks before approving a mortgage. This involves reviewing your bank statements to assess your financial habits and ensure that your debt levels are manageable, allowing you to afford the mortgage. Being transparent with your mortgage broker or lender from the beginning is essential in this process.

How does a mortgage deposit work?

A mortgage deposit involves paying a portion of your home’s price upfront, with the rest covered by a mortgage that requires monthly payments. A larger deposit results in paying off more of the house initially, potentially leading to lower monthly repayments and reduced mortgage interest costs.

How to get a mortgage using a loan for your deposit

Here’s a straightforward three-step process to secure mortgage approval with a borrowed deposit:

1. Seek Expert Advice:

Before considering borrowing, consult with an expert to determine if it’s the right approach for your mortgage. Discuss the loan type, borrowing amount, and explore alternative options.

2. Apply for the Loan:

Once you’ve decided on borrowing, initiate the loan application process. The procedure varies depending on whether you opt for an unsecured personal loan or an equity loan.

3. Choose the Suitable Lender:

Note that most lenders don’t accept borrowed deposits, limiting your options. Rely on your broker to identify the best available rate and recommend the lender that aligns with your situation.

Lenders and eligibility criteria

Several lenders, including Generation Home, Barclays, Kensington Mortgages, Tipton Building Society, and Stafford Railway Building Society, may consider deposits partially funded by privately sourced equity loans.

Lenders such as Santander, Norton Home Loans, Saffron, and Together are open to deposits from personal loans. It’s crucial to provide lender details, loan amount, terms, and security information. Additionally, meeting the lender’s eligibility criteria, including age, income, and employment status, is essential.

Notably, not all mortgage applications with borrowed deposits are guaranteed approval. Due to thorough scrutiny, it’s advisable to collaborate with a broker to strengthen your application’s chances.

Borrowing a mortgage deposit comes with its advantages and disadvantages:

Pros:

1. Speedy Property Entry: Borrowing allows you to enter the property market swiftly without the need to wait for extensive savings.

2. Beat Rising Prices: You can purchase a property before prices escalate further, potentially securing a more affordable deal.

Cons:

1. Additional Debt: Borrowing means taking on extra debt in addition to your mortgage, increasing your overall financial obligations.

2. Risk of Negative Equity: In some cases, borrowing a deposit may expose you to the risk of negative equity if property values decline.

3. Limited Mortgage Options: Borrowed deposits may limit your choice of mortgage products and could result in higher interest rates, impacting long-term affordability.