Gift letters: Find out why your lender may request one

With a record low cash rate of 2.0% and rising property values, many first home buyers looking to enter the property market are unable to scrounge the funds for a deposit. As a result, many young Australians are turning to their parents or an immediate family member for a gifted deposit that is both “unconditional” and “non-refundable.”

While some first-time buyers or young borrowers may be stimulated by low-interest-rate settings, many experts are citing rate hikes on the horizon, which means borrowing could become more expensive.

Coupled with the recent tightening of borrower guidelines due to the APRA’s new policies and changes to the First Home Owner Grant (FHOG), it’s likely that more Australian borrowers will need assistance through a gifted deposit to get into the real estate market.

ALSO READ; Home loan deposits: The gift that keeps on giving

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What is a gift letter?

Provided by a parent, guardian or close relative such as your grandparents, a gift letter confirms that someone is providing you with the funds to complete a deposit for a home loan. The gift letter must state that the deposit is an “unconditional” gift. Generally, it should not be repayable (some lenders may make an exception for this).

Most lenders require the gift to be held in the account for a minimum of three months prior to purchase application approval, particularly if you have less than 20% of the deposit saved up.

Why do lenders require a gift letter?

In some cases, lenders will need to confirm the source of your deposit to ensure that you are not sourcing the funds from credit cards, a personal loan or any other form of finance. In other words, the lender wants to make sure that you have not taken out another form of finance and won’t become preoccupied with servicing other debts.

What does the process involve?

If your parent or family member has agreed to gift you the deposit for a home loan, you will need to approach your lender to see whether or not a gifted deposit will be accepted. If so, you’ll need to provide the lender with a standard gift letter, an example of which is detailed below.

Most borrowers need to show proof of at least 5% in genuine savings, such as regular deposits from a salary over a period of no less than three months. The lender will ask to see recent bank statements as evidence of due diligence and financial discipline. If the lender doesn’t believe you can demonstrate financial discipline and the ability to put money away, you may be charged a higher interest rate or your application may be denied.

What does a gift letter look like?

Australian lenders have strict requirements about what needs to be included in the gift letter, including but not limited to:

• Confirmation that the gift is “non-repayable” and “non-refundable”, or confirmation otherwise of how the loan (not gift) will be repaid.

02/01/2016

To whom it may concern,

Re: Natasha Gyles

I confirm that I am giving my daughter Natasha Gyles an unconditional gift of $65,000 for her to use to buy a property located in Mona Vale, NSW. I confirm that this gift is non-repayable and non-refundable.

Should you require any additional information regarding this gift, please do not hesitate to contact me on 02 XXX XXXX.

Regards,

(parent signature)

Mitchell Gyles

1 York St

Sydney NSW 2000

You should speak to your lender or broker about any other steps required to ensure the acceptance of your gift letter.

What is a statutory declaration?

Alternatively, some lenders may specifically request a statutory declaration to confirm the gifted deposit. An example of a statutory declaration form is detailed below.

A bank will often ask for a statutory declaration as a precautionary measure to ensure that the gifted deposit is being provided by a family member, that it is “unconditional” and preferably “non-repayable.”

Statutory declaration checklist

While the process is fairly straightforward and your lender will specify what you need to include in the statutory declaration, many people omit important information. Here are some things to keep in mind when forming the statutory declaration document:

• Ensure the form is dated correctly.
• Include signatures from both parties (the person taking out the mortgage and the person offering the gifted deposit).
• Make sure it is signed by an authorised witness such as a Justice of the Peace (JP) and their reference number is included.
• If the lender has specified that you need to follow certain wording or format, ensure that you follow these guidelines.

What does a statutory declaration look like?

There are numerous declarations or details that a lender may need you to confirm, some of which include:

• Name change. Whether you’ve changed your title as a result of marriage or any other means, the lender may require you to include details of this in the statutory declaration.

• Loan purpose. Most lenders will request that you specify the purpose for the loan, such as whether its for owner-occupier or investment purposes.

• Living situation. Some lenders may need you to confirm information regarding your living status, such as whether you are paying rent in a property or living with your parents rent-free.

I/We: Mitchell Gyles

Of: 1 York St Sydney, NSW 2000 in the State of New South Wales (NSW), solemnly and sincerely declare the following:

I will give my daughter Natasha Gyles a total of $65,000 to assist her to purchase a property in Mona Vale,NSW. This gift is unconditional, non-repayable and non-refundable.

And I/we make this solemn declaration conscientiously believing the same to be true and by virtue of the provisions of the Oaths Act 1900 (as amended).

Subscribed and declared at Sydney NSW

January 02, 2016

(parent signature)

Mitchell Gyles

Witness:

(SIGN)

Name: (Name of JP)

Justice of the Peace #: 123456

Will I have to pay lender’s mortgage insurance (LMI)?

If your gifted deposit is less than 20% loan-to-value ratio (LVR), you may need to payLMI. However, it’s likely that you’ll be able to capitalise LMI into your loan.

Enter your details in the calculator below to work out how much you can afford to borrow.

Which lenders will accept a gifted deposit?

While some lenders will not lend funds to borrowers who have received their deposit money as a gift, there are several Australian lenders, such as the Commonwealth Bank of Australia and ING Direct, that will accept a gifted deposit for your loan application.

It’s important to note if you borrow the deposit from your parents and intend to repay the amount later, this is considered a loan and not a gift. Some lenders won’t accept this type of loan arrangement.

Tips for applying for a home loan with a gift letter

• Apply with a lender that views borrowers with gifted deposits as low-risk borrowers.
• Consider whether the gift jeopardises the financial position of the gift giver.
• Ensure that the gift giver seeks independent financial advice to see whether or not they are in a position to provide the unconditional gift.
• Carefully review the terms and procedures of the lender on how to provide a gift letter and/or a statutory deposit.
• Include as much detail as possible in your gift letter or statutory declaration regarding the loan purpose and any other relevant information.

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Frequently asked questions about gift letters

• What if my parents provide me the deposit as a loan, not a gift?

  The majority of lenders won’t allow you to have a borrowed deposit. It depends on the individual lending policies of the bank or institution that you apply with.

  Some lenders may approve the application if the deposit is a loan instead of a gift, but they will assess whether or not you can afford to service the loan along with the repayments on the home loan that you are applying for before approving your application.

  Your parents may ask you to increase your home loan to repay the loan from them at a later date. In this situation, there may not be regular repayments to your parents or interest charged by them. Check to see whether the lender allows you to apply for a mortgage increase at a later date.

• What’s the difference between a gifted deposit and a guarantor loan?

  If your parents don’t have the funds to gift you a non-refundable deposit, they may guarantee your loan by using their property as security for the loan, which is known as a guarantor loan. However, if you default on your mortgage, then the family member’s property is at risk. For this reason, gifted deposits may be a low-risk alternative.

• Will I still get a competitive rate?

  Although you are using a gifted deposit, most lenders will still offer a competitive interest rate, just as they would find if you weren’t using a gifted deposit. However, if the lender believes that you cannot demonstrate financial discipline or evidence of genuine savings, you may be charged a higher interest rate as a precautionary measure.

• What’s the benefit of using a gift letter?

  As most Australian lenders require you to complete a 10-20% down payment for a home loan, coming up with a deposit can be challenging. If you have a parent or family member that is willing to gift the money to you, you can get into the home loan market sooner and potentially avoid paying LMI.

• Will a lender accept a faxed copy of the gift letter?

  Most lenders will accept a faxed copy of the gift letter, but some will require your mortgage broker to hold the original copy.

• Can I receive a gift from an extended family member?

  Lenders will typically decide on a case-by-case basis. The lender will assess the closeness or proximity of your relationship with the extended family member when reviewing your application.

• What if a third party wants to gift the deposit to me?

  Banks will not accept a gifted deposit from someone other than an immediate or extended family member. This is because lenders are concerned that the person may simply lend you the money rather than it being an unconditional gift.

• Who can sign a statutory declaration?

  A statutory declaration can generally be signed by a JP or someone who is registered to practise in one of the following occupations, among others:

  • Legal practitioner
  • Medical practitioner
  • Pharmacist
  • Dentist
  • Psychologist