A gifted deposit is a popular option for home buyers in this current market. They are generally accepted by most banks but the individual lending policies and requirements differ greatly. Here are some of the issues to consider if you are getting a helping hand in the form of a cash gift as a deposit.
Who can give me money for a deposit?
It is most commonly a “mum and dad” leg up, however gifting funds isn’t restricted only to parents and their kids. Spouses, immediate or extended family members and, in some cases, even friends (with a reasonable explanation as to why) can supplement or even completely cover the required deposit for a home purchase.
How is it different to a guarantee?
Gifted funds actually eliminate the need for a guarantee in most cases. A guarantee uses equity from a family member’s home to allow you to increase your borrowing amount up to the full purchase price (plus stamp duty if required), while a gifted deposit reduces your final loan amount.
The approval process tends to be easier with a gifted deposit than a standard guarantee. That’s because the bank doesn’t need to take into account the personal details and financial situation of the gifting party.
Do I need to have my own savings as well?
Some banks will still want to see that you have established your own savings to demonstrate good financial conduct, even though you may not need to use it towards the loan. In some cases showing the bank a clear rental history can also give them confidence that you will be able to make your repayments.
How much deposit do I need?
There is no minimum or maximum gift amount but when it comes to deposits bigger is better. Banks tend to favour 20% or more as an initial contribution but you may still be able to obtain a home loan with a lesser deposit. If the gifted funds and/or your own savings aren’t enough to cover a full 20% deposit on a home, you may still be able to borrow the additional amount required, however you’ll be subject to Lender’s Mortgage Insurance (LMI). This is an upfront premium paid to an insurer to cover financial institutions when they lend above 80% of the property’s value, as it is considered an added risk to the bank. Some lenders will let you add the fee to your loan amount.
You may be able to apply for finance with a lender with as little as 5% in available funds (both as savings or a gift). In that case you’ll need to have the money for LMI and stamp duty (if applicable) as typically most lenders will not add these amounts to the loan if your deposit is less than 5%.
Is a gifted deposit only an option if I’m buying a home to live in?
Gifted funds aren’t restricted to buying a home to live in, they can also be used for investment property purchases.
What will the lender want to know?
As well as who is gifting the deposit the lender will probably ask for confirmation that the money is in fact a “non-refundable and non repayable” gift and not a loan. This is important because it means it doesn’t need to be taken into account as a future liability. It also means that you aren’t borrowing a higher percentage of the property value.
Most banks will want those giving the cash gift to write a letter, or, complete a statutory declaration confirming the funds are a “non-refundable” gift. Beware if you claim the money is a gift but try to increase your loan at a later date to pay it back you could get caught out as banks keep records of your application notes on file.
Lenders may also ask why the gift is being given, and want some assurance that the person giving the gift doesn’t suffer financially as a result.
In some cases, the financial institution may ask the person giving the gift to confirm the source of the funds before approving the loan. This may include asking for bank statements to prove the money is being held in an account.
Lenders may decline the use of a gift in some cases where they have reason to believe the gift has been sourced illegally or the giver is under duress.
It’s worth noting that usually a 10% deposit will need to be made upon exchanging contracts on a purchase, so be aware you’ll need to have the funds made available to you before the actual purchase settlement if you are relying solely on a gift.
About Michael Saliba
Michael Saliba is a Personal Mortgage Adviser and Commercial Lending Expert at Smartline.
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