For many taking the first step onto the Property ladder can present significant financial challenges. With rent averaging higher than monthly mortgage payments, saving up the crucial deposit is becoming more and more difficult.
Increasingly, many are therefore relying upon financial assistance from Mum, Dad, or other family members by way of a gifted deposit.
Gift or Loan?
The principle of a gifted deposit is rather straight forward, however if it is intended that any part of the funds is to be repaid at any time then this will amount to a ‘loan’ rather than a ‘gift’ and be treated differently by both the Lender and your acting solicitor. For this reason, identifying the intention of the agreement and nature of the funds being given, is important.
Details of any third-party contribution to the funding of the purchase, should be disclosed to the mortgage broker and your solicitor at the start of the transaction. Each Lender has different requirements depending on the nature of the agreement and should be fully informed as to the intentions. The reasoning behind this is that if the Lender has to repossess and sell the property in the future, they will want to do so without any claim from any parents, family members or any other party, seeking repayment of money due to them or claiming any legal rights.
If the deposit money is indeed an outright gift, then the person gifting the funds will need to sign a formal gift letter drafted by your solicitor confirming this. The person gifting the money, will be afforded an opportunity to seek independent legal advice prior to signing the letter. In addition to this, your solicitor will need to undertake the usual money laundering checks, including obtaining copies of the donor’s ID and proof of source of funds.
On the contrary, if it is the intention of the parties that the funds will be repaid then a formal Loan Agreement will need to be drawn up and consent will be required from the Lender - especially if the Loan is to be secured against the property.
If the funds provided are declared as a gift, but later it is in fact found to have been intended as a loan, then this will amount to a breach of the mortgage conditions and could be considered fraud.
Lenders are now offering a more diverse range of mortgage products intended to assist first-time buyers so it is always helpful to liaise with your mortgage broker as to what exactly could be offered to suit your personal circumstances.