Using a gifted deposit – home loan comparison
Home buyers with generous relatives can use a cash gift a home deposit, but you still need to prove you can repay your lender.
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Most lenders are happy for immediate family members to give their children a gifted deposit – home loan deposits are hard to save for, and a non-refundable cash gift can be a massive boost a borrower's mortgage deposit.
But there are a few rules and criteria you need to know to make sure the cash gift meets the bank’s policies.
When money is gifted to a property buyer close to purchase time, a gift letter or statutory declaration needs to be signed by the family member, stating that the money is to be used for the purchase of property and that the loan is unconditional. The rules around non-refundable gifts state that it needs to be from an immediate family member, which includes de facto, siblings, grandparents and parents.
Mortgage Broker Daniel Corran from McCombe Finance says lenders often require that the gift be held in the account for a minimum of three months before purchase application approval.
This is especially the case, Corran says, when a potential home-buyer has less than a 20 per cent deposit saved up, as this is the minimum amount required under the bank’s mortgage lenders’ insurance policy, which protects the bank against the risk of a borrower defaulting on a loan.
Most borrowers also need to demonstrate their own minimum 5% of genuine savings. This means that if you're buying a property worth $500,000, the bank wants to see evidence of your own savings worth 5%, or $25,000. Your family member might then be willing to give you a cash gift worth $75,000, giving you a 20% deposit.
The bank will sometimes ask to see a person’s previous banking records as evidence that a person is able to save money over a continuous period and is therefore likely to be able to service a home loan.
"The paperwork required regarding the gift differs between lenders,” Corran says. So it’s wise to get some help from a mortgage broker or do your research before submitting a loan application with a non-refundable gift included.
Corran says some families consider using their own home or an investment property as security in a “family-pledge” situation rather than gifting cash, however, if the borrower defaults on their mortgage, then the family member’s property is at risk when it is cross-secured. For this reason, Corran says non-refundable gifts are usually safer for families as there is no recourse against assets.
The final point Corran tells his clients when they’re considering giving a non-refundable gift to a family member is to make sure that it’s not self-sacrificing and that it doesn’t jeopardise the financial position of the gift-giver.
'The giftor should seek independent financial advice for themselves to ensure their viability to give the gift – to make sure it’s not going to significantly reduce the giftor’s standard of living or interrupt their cash flow,' he says.
Genuine savings explained
Maybe you were the beneficiary of an inheritance, or perhaps you've been gifted deposit money by your parents. Maybe, lucky you, you've won some money.
Regardless of how you come across it, it's certainly a nice windfall. But it doesn't mean you're guaranteed to get a loan. Even if you have money in the bank, most lenders require what's known as genuine savings. This means they want you to demonstrate an ability to save money. Saving money over a period of time shows financial discipline, and that's definitely a character trait lenders want in their home loan customers.
So in most cases, even if you come across a large sum of money, a lender will want you to hold it in your account for at least three months. For some lenders the time can be as long as six months.
But if you have at least 5% of the deposit in genuine savings (it's been in your account for three months) the rest can be a gift. Of course, every lender has its own lending criteria and some may accept the whole deposit as a gift.
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