Saving for a deposit is one of the biggest hurdles for first-time buyers or those looking to move up the property ladder. However, many buyers can boost their deposit with help from family, a gift, or other sources. Understanding the rules around gifted deposits and other deposit sources is crucial, as they can impact your mortgage application. Whether you are relying on personal savings, financial gifts from loved ones, or proceeds from the sale of assets, knowing what lenders require will help streamline your mortgage approval process and make homeownership more achievable.
In this guide, we’ll break down the different ways you can source your deposit and what you need to keep in mind when using them. There are many paths to securing a deposit, and each comes with its own set of rules and considerations. By understanding these options and preparing the necessary documentation, you can be well on your way to securing your dream home.
1. Gifted Deposits
A gifted deposit is one of the most common ways buyers receive help from family or friends to purchase a home. It is a financial gift, usually from parents, other relatives, or close friends, that helps cover all or part of your deposit. This type of assistance can make a significant difference, particularly for first-time buyers who may be struggling to save enough on their own.
What to consider:
- Proof that it’s a gift: Lenders require a signed letter confirming the money is a gift and that the giver expects no repayment. The lender needs to be confident that the gift isn’t a loan, which could impact your ability to repay the mortgage. The letter must clearly state that there is no financial obligation or expectation of repayment, as lenders need to ensure that no hidden liabilities will affect your affordability.
- Source of funds: Lenders will want to know the source of the gifted deposit to ensure the funds are legitimate. This means the person gifting the money may need to provide proof of where their funds came from, such as savings or inheritance. The origin of the funds must be clear and verifiable, as anti-money laundering regulations require lenders to scrutinise large deposits.
- Inheritance or early inheritance: Gifted deposits can often come from inheritance or parents looking to pass on money early. As long as it’s clear that the money is a gift with no conditions, most lenders will accept it. Early inheritance is becoming more common, as parents wish to see their children benefit from their financial support during their lifetime, helping them to get a foot on the property ladder.
2. Savings
The most straightforward and common way to source a deposit is through personal savings. If you’ve been saving over time, you’ll need to provide bank statements to prove the funds are in place. Building a deposit through your own savings can demonstrate financial discipline, which lenders look upon favourably.
Things to keep in mind:
- Track your savings: Lenders will want to see where the savings came from and may ask for a history of your savings account. Make sure your savings are consistent, and avoid large unexplained deposits right before your application. Keeping a clear record of how you’ve built up your savings over time will make the process smoother and reduce the likelihood of further questions from the lender.
- ISA accounts: Many people save their deposit through a Help to Buy ISA or Lifetime ISA, which offer bonuses for first-time buyers. These accounts can be a great way to boost your deposit while earning interest or bonuses from the government. The bonus can significantly enhance your savings, making these ISAs a popular choice for first-time buyers looking to maximise their deposit. Be aware of any deadlines or limitations on withdrawals to ensure the funds are ready when needed.
3. Sale of Assets
If you’re selling high-value assets like a car, another property, or shares to raise your deposit, you’ll need to provide evidence of the sale. This method can be a practical way to increase your deposit, especially if you have assets that are no longer needed or can be liquidated to help you move forward with your property plans.
What lenders expect:
- Documentation of sale: Lenders will ask for proof of ownership of the asset and documentation showing the sale. This could include receipts, sale agreements, or bank statements showing the funds entering your account. Proper documentation is crucial to verify the legitimacy of the funds and to satisfy anti-money laundering checks.
- Timing of the sale: Make sure the funds from the sale are already in your account when applying for the mortgage, as lenders generally won’t accept future sales as a deposit source. Planning ahead is essential; the money must be readily available, and all documentation must be in order before you apply for your mortgage.
4. Equity from Selling a Property
If you’re moving home and selling your current property, the equity you’ve built up can be used as your deposit for your next purchase. This can be a significant advantage for those looking to move up the property ladder, as the equity can often provide a substantial deposit, reducing the need for additional borrowing.
How this works:
- Calculating equity: Your equity is the difference between your current mortgage balance and the market value of your home. When you sell, this equity can be used as your deposit for your new home. The more equity you have, the larger your deposit, which can lead to better mortgage rates.
- Timing: You’ll need to carefully time the sale of your current property and the purchase of your new one to ensure the funds are available when needed. Coordination is key, as any delays could impact your ability to proceed with the purchase. Bridging loans may be an option if there is a gap between selling and buying, but they come with additional costs.
5. Joint Borrower, Sole Proprietor
Some buyers, especially first-time buyers, may benefit from a joint borrower, sole proprietor mortgage. In this scenario, a family member, usually a parent, helps with the mortgage repayments without being on the property’s title deeds. This arrangement allows the borrower to increase their affordability while keeping ownership solely in their name.
Key points to note:
- Who contributes: A parent or relative contributes to the monthly mortgage payments, helping you afford the property. However, they don’t have any legal ownership of the home. This type of arrangement can provide the financial support needed to buy a property, especially in areas where property prices are high.
- Lender requirements: Lenders will assess both the borrower’s and the supporter’s financial situations to ensure that repayments can be maintained. Both parties will need to pass affordability checks, and the supporter must be comfortable with the financial commitment involved.
6. Guarantor Mortgages
A guarantor mortgage allows a family member or close friend to guarantee the mortgage. This means they agree to cover the mortgage payments if you’re unable to. It can be a good option if you have a limited credit history or if your income doesn’t quite meet the lender’s criteria.
What to know:
- Guarantor responsibilities: The guarantor uses their own savings, home, or other assets as security against the mortgage. If you fail to make payments, the lender can request the guarantor to step in. This is a significant responsibility, and it’s important that both parties fully understand the risks involved.
- Limited ownership: The guarantor doesn’t have any legal ownership of the property, but their assets are at risk if you default on the mortgage. This means that if you are unable to make repayments, the guarantor could face serious financial consequences, including the possibility of losing their own home if it has been used as collateral.
7. Government Schemes
The UK government offers various schemes to help buyers with their deposit, particularly for first-time buyers. These schemes are designed to make homeownership more accessible, especially in challenging market conditions.
Examples include:
- Help to Buy Equity Loan: The government lends you up to 20% (40% in London) of the cost of a new-build home. This means you’ll need a smaller deposit, though you’ll eventually need to repay the loan. The Help to Buy scheme can make new-build properties more affordable, but it’s important to consider the repayment terms and any interest charges that apply after the initial interest-free period.
- Shared Ownership: You buy a share of the property and pay rent on the rest, meaning you need a smaller deposit since it’s based on the value of the share you purchase. This scheme allows you to gradually increase your ownership over time, known as staircasing, until you own 100% of the property. It’s a great way to get on the property ladder with a smaller initial outlay.
8. Inheritance
If you’ve recently received an inheritance, this can be used as your deposit. However, lenders may require proof of where the funds came from and documentation showing that the money is now in your account. Inheritance can provide a substantial boost to your deposit, potentially giving you access to better mortgage rates.
Considerations:
- Proof of inheritance: Lenders may ask for a copy of the will or legal documentation showing the inheritance has been received. Proper documentation is crucial to avoid delays or complications in the mortgage application process.
- Using a large sum: Inheritance can often be a large lump sum, and lenders will want to ensure this doesn’t affect your ability to manage your other finances. It’s important to consider how using the inheritance might impact your overall financial situation, including any ongoing obligations or potential tax implications.
Important Considerations When Using Any Source of Deposit
- Proof of Funds: Regardless of where your deposit comes from, your lender will need evidence that the funds are legitimate. Be prepared to provide detailed documentation to satisfy their requirements. This can include bank statements, signed letters, and sale receipts. The clearer your records, the smoother the process will be.
- Anti-Money Laundering Regulations: Lenders are required to comply with strict anti-money laundering regulations, so they will scrutinise where your deposit comes from and may ask for additional paperwork or explanations for large deposits. These regulations are in place to prevent illegal activities, so it’s important to be transparent about the origin of your funds.
- Consult a Mortgage Broker: If your deposit comes from a less traditional source, such as a gifted deposit or sale of an asset, it’s helpful to speak to a mortgage broker. They can advise you on how best to present your deposit to a lender and which lenders are more flexible. A mortgage broker can also help you navigate the complexities of different deposit sources and ensure that your application meets the lender’s requirements.
Final Thoughts
Sourcing your deposit from a range of places can help make homeownership more accessible, but it’s essential to be aware of the rules and requirements surrounding each option. Each deposit source comes with its own set of benefits and potential challenges, and understanding these will put you in the best position to move forward confidently. If you’re unsure how your deposit will affect your mortgage application or need help navigating the process, speak to a mortgage broker at Quick Mortgages. They can provide personalised advice and help you find the right solution to meet your needs, ensuring that your path to homeownership is as smooth as possible.
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Disclaimer:
This article is for general guidance purposes only and does not constitute legal, financial, or professional advice. Mortgage products and their terms can vary, and it is important to seek advice from a qualified, regulated professional who can assess your individual circumstances. Please ensure you consider your unique needs before making any financial decisions.
While every effort is made to ensure that the information provided on this blog is accurate and up-to-date, we do not guarantee its completeness or accuracy. The mortgage market can change rapidly, and the information on this blog may become outdated. We recommend verifying any information before acting on it and seeking tailored advice.
THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME OR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
