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Using gifted deposits to fund your mortgage

April 12, 2021
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More and more people are turning to gifts from relatives to help fund their dreams of homeownership. With wages failing to keep up with inflation, monthly budgets are stretched to the maximum, leaving little room for savings. To help plug this gap and help individuals onto the property ladder, older relatives may choose to give a gift to put towards a deposit. In some cases, this will bolster savings but in many cases, the gift is the entire deposit.

This might seem like a practical solution to a common problem, but it can cause issues for many lenders. Some lenders are sceptical about large sums of money being given as a gift. In this article, we will look at how to declare your mortgage deposit as a gift and how to limit the damage this can do to your application.

Why are mortgage providers sceptical about gifted deposits?

There are three main reasons that lenders are sceptical about using money given as a gift as a deposit. First off, lenders prefer when borrowers use their savings. They might be nervous about an interested third party. And finally, in the case of a buy-to-let property, the gift could be considered an investment. Let’s look at these three concerns in more detail.

Lenders prefer personal savings

There is a very simple reason that lenders prefer you to use your savings. It shows a commitment to your finances and the ability to live within your means. Saving money is not an easy task, and when you are trying to demonstrate that you are fiscally responsible, using your savings is an excellent way to achieve this. By showing that you have consistently had a surplus of money at the end of each month, you give the lender confidence that you will be able to make the repayments.

Lenders worry about third party interests

If you accept a gift as your deposit, there is concern that the person giving the money may make a legal claim over partial ownership. If the borrower were to default on the mortgage, the individual who gave the gift of a deposit may need to be consulted during the repossession. This complicates things for the lender.

Likewise, while the lender has the legal right to check the financial status of the applicants, this doesn’t extend to the person giving the gift. This raises issues for money laundering checks which are required by law. The lender must take a leap of faith when accepting a mortgage application from someone with a gifted deposit.

Buy to let investment

If the property is a buy-to-let purchase, then the gifted deposit will be considered as an investment. A buy to let is an investment, so there is no reason to believe that the gifted deposit does not come with strings attached. If the interested third party expects a return on their investment, this can complicate things for the lender.

The lender may seek written confirmation from the third party that confirms they do not have a financial interest in the property. However, this isn’t always accepted. A parent might wish to help their child onto the property ladder, but helping them expand their housing portfolio is another matter entirely.

Who can give a gift for a deposit?

There are also rules surrounding who you can accept a gifted deposit from. In most cases, the majority will only accept an application if the gift is from a parent. Even less would accept an application if the deposit is a gift from grandparents, siblings, aunts and uncles or extended family. Hardly any lenders would accept an application if the deposit is a gift from a friend.

What if the deposit comes from a relative abroad?

Lenders will be very nervous about accepting an application when the deposit is a gift coming from an overseas bank. The lender has an obligation to carry out Anti-Money Laundering checks, and this would be more difficult when the money is from overseas. While lenders do have the ability to carry out international checks, this complicates the process for them. Building societies would not be able to carry out these checks and would rule them out entirely.

Lenders will likely ask that the money be transferred to a UK bank account, rather than coming directly from overseas. They will also need photo identification from the person giving the monetary gift. Some countries are favoured more than others by lenders, so this will also play into the likelihood of being accepted.

Will the gift giver have any claim to the property?

No, for the gift to be a true gift, they would have to waive all rights to reclaiming that money or claiming a portion of the property. They would not be able to place a charge on the property for repayment of the gift in the event of a future sale. This is why family members need to think carefully about the nature of the gift.

To find out more about gifted deposits and how to increase your chance of being accepted for a mortgage, get in touch with Niche Mortgage Info today. We can provide advice and support on the best route forward when purchasing a property with a gifted deposit.

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