In This Article
A guide to a family deposit mortgage
In this day and age, the bank of Mum and Dad has become a large UK lender.
Borrowers are turning to their families for help in providing their deposit, so lenders do what they can to support these applications.
There are a number of ways a family can help one another with a deposit for a property.
As a result, it is important to pick a lender that can accept your method of deposit.
Gift from family
The most common way is an outright gift from a family member.
This means that a person (often a parent or grandparent) gifts an amount of money to the borrower, confirming that they will have no interest in the property and will not live in it at any time.
This means that it is an outright gift with no conditions.
Loan from family
Another common method is to provide a family member with their deposit, on the basis that it is repaid in the future, and sometimes with interest charged.
A way of protecting these funds is by creating a declaration of trust or placing a charge on the property.
This means that the person that provided deposit funds has an interest in the property. They may even make a profit if the property increases in value, depending on the agreement.
Not all lenders like this arrangement, so it is important to talk with a mortgage adviser about your intentions.
Charge over a family member’s property or savings
Another method is by way of a charge over a family member’s own property or savings.
This means the lender can release a larger amount of money, protecting themselves by using multiple people’s assets as collateral.
Again, few lenders offer this agreement, so you should find a mortgage adviser with plenty of experience who can tell you your options.
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What is a springboard mortgage?
A springboard mortgage is a scheme where a family member’s savings are used as collateral for the deposit.
They are held in a bank account allocated for this use and are not invested in the property.
This allows a lender to offer a larger loan, subject to affordability, with the peace of mind that if the mortgage was not paid and the property was repossessed, these savings are available as security, should there be a shortfall.
The funds used as security are usually provided by a parent who trusts that their son or daughter will successfully pay the mortgage, and their funds will remain protected.
They will not be able to access their savings for a period until the property is refinanced and they are released. This often happens when the house has risen in value.
This method has pros and cons, as it allows families to help one another with deposit funds without fully investing them into the property.
If you are considering doing this to help a family member, make sure you fully understand the agreement and take independent legal advice.
Many people ask if a mortgage broker can get them a larger mortgage, if you are looking to get the maximum loan often speaking to a mortgage advisor is the best option.
How does a gifted deposit work?
When a deposit is an outright gift, this means that you will have no right to the money back in the future and no interest in the property.
Many lenders also stipulate that you are not to live in the property at any point following the gift being given.
Lenders will usually require you to draft a deposit form confirming that there are no conditions to your gift and you have no financial interest in the property.
Lenders or solicitors may wish to see proof of funds and a build-up of them to suffice their money laundering checks. Read more: Family Boost Mortgage.
How does a Declaration of Trust work?
A Declaration of Trust is a legal document that confirms a person’s interest in a property.
The terms of a Declaration of Trust can vary, depending upon the party’s individual agreement. For instance, if a parent was helping a child to buy their property, they may wish to protect a certain amount of money and get back that same amount when the property sells.
However, the family may wish to protect equity within the property, so they get back that same percentage in the future.
For example, if a parent gave their child £30,000 as a deposit on a property bought at £300,000, this would equate to a 10% deposit.
If, in the future, the property on this agreement sold for £400,000, the parents would make a £10,000 profit on the lent funds.
Solicitors draw up Declarations of Trust and register them with Land Registry.
The cost of doing this will vary depending on the firm of solicitors that arrange it, although a common price is approximately £500.
Your solicitor will be able to tell you the cost before going ahead.
Can the family giftor live in the property?
With the majority of lenders, they make it a condition that a giftor is not able to live in the property that is being bought with the gifted funds.
The main reason is to stop them from trying to present a repossession if it was to occur.
There are, however, lenders that can consider the mortgage even if the giftor plans to live in the property.
Some will even allow them to have a financial interest in the house once they have gifted the money.
As not all lenders offer this, it is recommended that you look for an experienced mortgage adviser who can look for the correct lender for you, based on your wishes regarding gifted deposits.
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Do all lenders offer gifts from family towards deposits?
Most lenders are happy to accept gifted deposit from family members.
They do, however, all have their own conditions. Most will insist the deposit is an outright gift and not to be repaid in the future.
Many lenders also need confirmation that there will be no financial interest held by the giftor and they will not live in the property.
Other lenders can have quirky rules, such as only allowing gifted deposits from family members that own their own residential property.
Some lenders even have rules around which family members are acceptable as gifted deposit providers.
For instance, a grandparent being acceptable, but a cousin being unacceptable.
Besides individual rules around the family gifts that lenders may have, almost every lender is willing to consider a gifted deposit as long as it meets their own criteria.
A mortgage adviser can give you more guidance around lenders’ individual deposit rules. You can also find information on Specialist Lenders here.
Can a family gift negatively affect a mortgage application?
In most cases, a family gift will not negatively impact your mortgage application. However, this exception may be credit scoring through a lenders’ system.
Some lenders work on a points basis when an agreement in principle is being applied for.
If a deposit is gifted rather than saved by the borrowers, they can sometimes score fewer points, which could impact the application.
Saving up a deposit shows a lender that you have experience putting money aside and growing it. This can look good when applying for a mortgage.
Having said this, receiving your deposit as a gift from an acceptable family member is usually not a bad thing.
Your mortgage adviser will be able to give you more details about who is and isn’t able to gift you deposit funds for your purchase.
The bank of Mum and Dad continues to provide their offspring with property deposits on a daily basis.
As a result, lenders have adapted the rules to accept family gifts over the years.
However, they all have their own criteria around what is and is not acceptable when gifting money.
These may be conditions around living in the property or protecting your financial interest.
If you are looking for a mortgage and the deposit comes from a family gift, you should talk to an independent mortgage adviser.
They will be able to search for lenders that can accept your deposit.
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