The Bank of Mum & Dad: How A Gifted Deposit Works

by Carlisle Homes

If you’re having a tough time saving a deposit for your first home, your parents or a close family member may be able to help – here’s everything you need to know about gifted deposits.

One of the hardest parts of getting your foot on the property ladder, particularly if you’re renting, is saving for a deposit. So, if you’re fortunate enough to receive a gifted deposit from your parents or a family member, that’s often the biggest hurdle overcome.

But how does a gifted deposit work, and how much do you need? We spoke to the experts at Mortgage Domayne, to find out.

What is a gifted deposit?

A gifted deposit is a cash gift given to you by your parents, an immediate family member, or an extended relative that covers the deposit for your new home. As this money is a gift, there is no expectation for you to repay it.

Who can provide a gifted deposit?

Lenders will normally accept a gifted deposit from your parents, although they may make exceptions for immediate family members, such as siblings, grandparents, or your spouse.

If you have received the lump sum from an extended family member, such as an aunt or uncle, you may need to explain the nature of your relationship to your lender to establish the gift’s unconditional nature.

Do you pay a higher interest rate with a gifted deposit?

No. Using a gifted deposit for your new home does not come with higher interest rates or additional charges.

How is a gifted deposit different to a guarantee?

If your family member isn’t in a position to provide a cash gift for your deposit, they can choose to use the equity in their own home to help you secure a loan. This guarantee allows you to increase your borrowing amount up to the full purchase price (plus stamp duty, if required).

It’s important to note that the approval process is generally easier with a gifted deposit than a guarantee, as the lender doesn’t need to factor in the guarantor’s financial situation and personal details.

With a gifted deposit, what does the lender need to know?

If you’ve received a cash gift, your lender may request a signed statement from your parents or relative to confirm that the funds were gifted without any conditions. This assures the lender that the money isn’t intended for repayment, as this could affect your ability to repay your home loan.

Some lenders may request a letter from the gifting party that includes the following information:

• The gifted sum.
• A declaration that the sum is a no-strings-attached, non-repayable gift.
• A declaration confirming that the giver holds no stake in the property.

Do you also need savings?

Some lenders will still want to see evidence of your own savings to demonstrate responsible financial behaviour, even though you may not need to use these funds for the loan.

In some situations, a good rental history can also serve as evidence of your repayment capability.

How much do you need for a deposit?

While there is no set minimum amount for a deposit, generally speaking, the bigger the better.

A deposit of 20 percent or more of the value of a home is considered favourable by lenders, and may give you access to more competitive loan terms, such as lower interest rates.

But you can often buy a home with less; some lenders will give you a home loan with as little as five percent deposit. However as this is considered a greater risk to the lender, you will be subject to Lenders Mortgage Insurance, which is a one-off, upfront fee paid at settlement that protects the lender if you default on your home loan.

When it comes to first home ownership, no two journeys are ever alike. But one thing is certain; being diligent with saving and taking the time to explore the various options available will get you one step closer to your dream.