What is a gifted deposit?

• A straight talking guide to guarantor home loans written in plain English.
• Learn if a guarantor home loan is a better option compared to a gifted deposit.
• Learn how to write your letter of proof and how to prove the source of the gifted deposit.

The average loan size for first-time homebuyers in Australia was around $370,000 in 2019, far more than some people can afford. Though qualifying for the loan itself may not be challenging, coming up with the 20% deposit for a home loan certainly is.

One unconventional finance opportunity is a gifted deposit. If you’re struggling to come up with the down payment on a home that costs hundreds of thousands of dollars, a family member could contribute a portion or the entirety of the amount you need by gifting the money to you.

However, a gifted deposit isn’t as simple as a money transfer. Read on to find out how this finance option works and whether it best suits your needs.

What is a gifted deposit?

A gifted deposit refers to a lump sum of money given to a prospective homebuyer as a means to fulfil their minimum down payment. More often than not, a gifted deposit will come from an immediate family member or close relative. Because the money is a “gift”, there is no expectation on the homeowner to repay the amount.

Who is qualified to gift a deposit?

When it comes to gifted deposits, most mortgage lenders prefer to keep it within the family. So, many will accept a source of funds from your parents, siblings, or grandparents. Some will also permit a gifted deposit from more distant relatives such as an aunt or uncle, though the practice isn’t prevalent.

It’s improbable for a mortgage lender to permit a gifted deposit from a friend. As a rule of thumb, always discuss your options before you pursue them, as some lenders may enforce more restrictive policies than others.

Writing a gifted deposit letter

To confirm the source of the money, your lender will likely request a gifted deposit letter. This letter assures them that you aren’t ‘borrowing’ your deposit via a credit card or other loan. A deposit letter must include information such as:

• The names of the persons giving and receiving the gift
• The sum of the gifted deposit
• That there is no commercial interest in the gesture and that there is no expectation of repayment
• That the gifter holds no stake in the property and cannot jeopardise the mortgage lender’s security
• That you remain financially solvent and capable of meeting monthly repayments

Other than the gift giver, a witness will also have to sign and date the letter. You’ll then have to present the letter to your conveyancing solicitor, who will consider the document a legal statement.

The features of a gifted deposit

You need to take the following features into account when considering a gifted deposit:

Amount limit

How much you receive is entirely up to the gifting party. They can choose to gift a portion of your deposit or cover the whole amount. However, it’s vital to keep in mind that contributing a little bit of your savings towards your deposit will look better to the prospective lender.

To determine where the funds are from, your lender might request proof. This proof of funds might be a receipt from the sale of a large asset, shares, or a pension draw-out. If the funds are from a savings account, you might have to provide evidence of the gift giver’s long-term savings, in line with anti-money laundering guidelines.

Interest rate

There is no need to pay a higher interest rate with a gifted deposit. Most lenders will offer the same competitive rates as they do on regular home loans.

Lenders Mortgage Insurance

If you’re borrowing over 80% of the property value with a home loan, you’ll typically have to pay Lenders Mortgage Insurance (LMI). This policy protects the lender if you default on your loan. In some cases, lenders will allow borrowers to add the LMI premium to the existing loan, which means if you’re taking out a $370,000 loan on a $400,000 property, the total loan amount will be around $380,000.

Centrelink pension implications

Some gifted deposits come with financial implications, especially if gifters receive pensions as part of a Centrelink payment plan. A gifter may have to declare money depending on the gift amount. To avoid affecting their pension, gifters, whether as a single person or a couple, must limit donations to $10,000 a year or $30,000 over five years.

While it’s entirely possible to exceed this limit, Centrelink will calculate the excess and apply a process called “deeming” to determine the amount of income support they can provide.

Gifted deposit vs guarantor home loan

If your family member can’t contribute enough for a deposit, they can choose to stand in as a guarantor on your home loan instead. Through this procedure, your parents use the equity in their home to help secure your loan. However, agreeing to stand in as your guarantor involves an entirely different process.

Despite their seeming similarities, a gifted deposit and guarantor home loan serve two different purposes. While a guarantee allows you to increase your borrowing amount up to the full purchase price of the property, a gifted deposit will directly reduce the final loan amount.

A guarantor home loan may be more useful because you can avoid a big upfront deposit. With a guarantor, you’re less likely to miss monthly repayments and can work towards eliminating LMI. Guarantors don’t have to be limited to your parents. You might be able to ask a close friend to step into the role if this is acceptable to the lender.

The pros & cons of a gifted deposit

As much as possible, you’ll want to be financially prepared to receive a gifted deposit and understand whether your parents are in a good position to give you one. While a gifted deposit has its perks, it can become a financial strain on both parties.

How they work in your favour

A gifted deposit works in your favour for obvious reasons; when you have one, you can meet your deposit minimum, plus you won’t be legally obligated to repay the amount. When compared to a guarantor home loan, the approval process for a gifted deposit is prompt and involves less paperwork. Overall, a gifted deposit is useful in minimising interest payments during the life of your loan.

How they work against you

With a gifted deposit, the long-awaited dream of becoming a homeowner is right around the corner. However, you’ll have to consider whether you’re financially capable of monthly repayments that will occur after you receive your gift. Will your earnings be enough to settle monthly repayments on time? Could you pay for repairs and replacements on your own?

Some banks will want to see that you demonstrate good financial conduct by asking to review your savings history, credit score, and payslips. Suppose they determine that you’re at a monetary disadvantage and don’t have a positive rental payment record. If so, a gifted deposit isn’t going to make an impact on your eligibility for a loan.

Alternatives to a gifted deposit

A gifted deposit isn’t the only method of securing your minimum down payment. If you’re a first-time homebuyer, you might qualify for the First Homeowners’ Grant (FHOG). The grant amount will vary according to which state you reside in, though the total allowable value of properties must be no more than $750,000.

Accepted applicants must then move into the property within 12 months of settlement or construction, and use the home as their primary place of residence for at least a year. Those who cannot meet these requirements for the FHOG must notify the Commissioner for ACT Revenue and repay the grant within 14 days of notification.

Those looking to build a new property or renovate an existing one can apply for a HomeBuilder grant. This program aims to help owner-occupiers through the coronavirus pandemic. Homebuyers have to meet the following criteria:

• They are at least 18 years old.
• They meet the $125,000 per annum income cap ($200,000 for couples).
• They are looking to enter into a construction contract from June 4, 2020 to December 31, 2020.

In conclusion

As house prices skyrocket, gifted deposits are becoming a widely-accepted norm. Many parents are more than willing to provide financial assistance to help their child navigate a continually rising cost of living.

If you’re considering gifted deposits as an option, be sure to speak to a mortgage advisor or financial advisor to determine whether it’s right for you and how to best go about the process.