Balmain resident, Byron asks
“I don’t have any genuine savings but my parents said they’d be willing to give me the 10% deposit required to purchase my own home.
Is a gift acceptable as a deposit?”
Thanks for the question Byron.
This is most certainly a question that we get here often and one that is pretty frequently asked. If you don’t have any legitimate means of savings, there are some options open to you, especially if your parents are offering financial assistance. Here they are.
Every lender will have different loan qualifying criteria and there are a number of lenders who will finance up to 90% of the purchase price, plus mortgage insurance without the need for genuine savings. So, you are able to make application in this way, and the deposit funds can be a gift, the only condition is that it is a cash deposit.
Lenders stipulate that this deposit be cash because it is needed to complete the settlement but does not necessarily have to be in the borrower’s account when they apply for the loan. A letter or statutory declaration from the parents confirming the gift amount and noting that the amount does not have to be repaid is usually acceptable.
We have been asked if the deposit could be in the form of shares or another type of security, and while the short answer could be yes, it would need to be liquid money. The funds will need to be converted into cash quickly since property settlement takes 4-6 weeks and this deposit, cash gift will be required to complete settlement.
Loan approval is largely circumstantial, in some instances a lender will consider financing up to 95% of the purchase price without the borrower reflecting genuine savings and some that will require a 20% deposit as a condition if there is no proof of genuine savings.
In order to access several lenders, a 10% deposit would be the recommended minimum. Under 10% and your options become limited, in addition, you may be subject to higher interest rates. This is not to say a gift of under 10% deposit will not be accepted, it’s just not as common.
Some lenders will consider rental history as genuine savings. If you have been renting for between 3 and 12 months, through a licensed real-estate agent you are able to request a letter from the agent, or a rental ledger to demonstrate your financial responsibilities are being met highlighting your rental stability, reliability and payment consistency history.
My gift deposit is not from a family member, is this still acceptable?
A lenders preference is that a gift is accepted from a direct relative because there is an incentive to help but while it’s uncommon for a non-family member to provide a deposit as a gift and may be questioned, it’s not denied by lenders.
Irrespective of deposit amounts and where this originates from proof of income and your capacity to pay off the loan is of primary importance. A bank will evaluate current income, existing liabilities, and normal day to day living expenses to determine your eligibility and if you are able to afford the loan repayments. A cardinal lending rule is that all Five Cs of Lending are satisfied.
They are capital, capacity, collateral, conditions, and character. Capacity determines the affordability, collateral is the deposit. Both factors need to be considered in tandem and if both are not justified the likelihood of loan approval will be slim.
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Whether you are a first home buyer just starting out on your real estate journey, an experienced investor or you are just looking to get a better deal on your current home loan then we can help.