Family Mortgages & Gifted Deposits
House prices in the UK have risen sharply over the last 20 years, no great surprise there. Wages have grown less sharply. In the same 20 year period mortgage payments have risen from 20% of take-home pay to 35% of take-home pay. In London, this reaches 64%.
These two graphs put the figures in perspective;
The impact of this is that more and more young people cannot afford their own home, especially not in their sole names.
Our experience is that whilst home ownership becomes less affordable we are seeing young people looking to buy investment properties to get a foot on the ladder. We are also seeing family members either go into ownership with them or offer a gifted deposit.
This is evidenced by the growth in Equity Release where there are now over 200 lenders active in this sector compared to just 40 five years ago.
Whilst detailed analysis of the use of Equity Release funds is not available, experience says that a large portion of these funds is being used to support children getting onto the property ladder.
Mortgaging Family Connected Properties
The issue lenders often have is that by gifting a deposit that person could have an interest in the property, this could (in theory) impact on the lender obtaining clean title in the event of repossession. The lender will also want to confirm that there is no avoidance of insolvency or removing funds to avoid bankruptcy claims, they will also want to understand why the transaction is happening.
When it comes to immediate family, it is fairly simple to understand why a parent would gift cash to a child, when the relationship moves to Brother, Sister or beyond that then it becomes less obvious and the lender will have concerns over true ownership and money laundering.
In short, gifted deposits are not always a lender’s favourite thing.
That said, it can be done with a few items clarified at the outset, these are;
- Prove where the funds have come from. Bank statements will be needed to prove the source of funds
- Explain the rationale, especially if the gift is from a family member who is not immediate
- Be prepared for bankruptcy searches which will likely need to be clear for all parties
Buy to Let
As mentioned above, we are seeing an increase in first-time buyers going for investment properties to get a foot on the property ladder.
The concern among lenders is to ensure that a buy to let mortgage is not being used to navigate around mortgage regulation. This means finding a lender who will understand you want your own property but not to live in. Again, this can be done, it just isn’t for every lender.
The complex part comes when you combine a family gifted deposit with a first-time buyer purchasing an investment property.
What makes this interesting is that it is a growing trend borne out of the rise in house prices, demand for rental properties, slow wage growth and parents wanting to support their children.
In many ways, we are seeing another change in the pattern of property ownership, similar to the growth in short term lets. Similar again is that mortgage lenders are sitting behind the trend.
To solve the issues many lenders have with a combination of gifted deposits and first-time landlords then it is worth addressing the lender’s concerns upfront, to this end think;
- Does what I want to do make practical sense? Think, is there a sound rationale for buying a property in your own name then staying where you are
- Does the deposit source make sense? If the deposit is coming from Mum or Dad then no great issue, if it is from another family member or friend then explain the rationale and focus on why that person is happy to give you money for nothing in return
- Explain why the deposit is a gift not a loan. This is about outgoings and affordability, concentrate on why the deposit comes with no need to repay. Again, easy enough with a deposit from Mum or Dad, more thought required when from someone else
- Explain why you can manage the new property. This could be as simple as placing with agents. You may want to show a contingency fund for repairs and voids as this can be enough to make a lender say yes to a marginal deal
All food for thought, for anything else or if you want to discuss family purchases, gifted deposit mortgages or first time buy to let lending then get in touch.
By Dave Farmer