Mortgage Gift or is it a loan - What to do when buying a home
26/04/2020
Often the only way you can afford to buy your first home is by receiving gifted deposit money from your parents. In fact, 80% of first time buyers get financial help from their parents. The principle is simple, but structuring it can be far from that. Here are some questions you need to answer:
- Is it a mortgage gift or are you going to have to pay it back?
- If it is gifted, what happens if you fall out with the person who gifted the money and wants it back?(read our top rated article - What to do when receiving a gifted deposit
- If it is a loan, is you mortgage lender happy with this? What are the terms of the loan? Is there any interest to pay? When is the debt to be repaid?
Whilst Borrowing money from family (in that article we cover how to draft a loan to a family member) is common when buying property you may think how the money is given doesn't matter because you are family, however if you are getting a mortgage then you'll need to be clear on who owns the money being used to buy the property. Your mortgage lender needs to know if the money is a gift or a loan. The reason for this is simple, they want to know if anyone else is going to have a claim over the title of the property they are lending a large sum of money on. Mortgage lenders do not want to have challenges from parents if they have to repossess and sell the property. In the mortgage lender's eye, they'll want to know they can repossess, sell the property and repay their loan without anyone else claiming there is money due to them.
If it is a gift, the mortgage lender will need a letter confirming this. If it is a loan then the mortgage lender needs to confirm they are happy for a 2nd charge to be registered against the property. Often mortgage lenders do not allow this, especially if it is a high loan to value mortgage.
Buying your home using a mortgage gift?
We don't charge any extra if you want to use a gifted deposit to help pay for your home, unlike so many other conveyancing solicitor firms, something really appreciated by our many satisfied first time buyer customers.
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What is a gifted deposit?
A gifted deposit is a gift - the giver has no legal ownership to the thing given. In English Law it is presumed that all money paid by a father to his children is made as a gift unless otherwise stated; a presumption of advancement. The law only looks at fathers in this way and it is assumed that if a mother pays money to her child, her child will pay it back unless stated otherwise. Although there is a difference between a mother and father in the eyes of the law, in practice they would be viewed the same, however this has yet to be tested in court.
Because of this assumption in practice that payments made from parent to child are assumed to be a gift, it is important to document the agreement if the money given is to be repaid.
If the money is a gift then you'll need to provide a letter confirming this to your child's solicitor and mortgage lender (read our top rated article - What to do when receiving a gifted deposit
What is a loan deposit?
A loan can be provided to fund the deposit in circumstances where your parents want the money to be repaid. As discussed above, because the money isn't a gifted deposit you'll need to have an agreement clearly stating the terms the loan is to be repaid. The loan agreement should include:
- Amount loaned
- Time frame for when the loan is to be repaid
- Amount of interest applied to the loan
- Details of what happens if the loan isn't repaid or the contract is breached
In the event that the loan does have interest to be repaid, then there are additional points to be agreed as set out in the Consumer Credit Act. For most parents, they'll be satisfied for the loan to be repaid and not to benefit from any interest on the loan.
We can help draft an agreement to set out the intentions between parents and child. For more help and a free quote, call our team of specialists on 0333 344 3234.
Can you call it a gift even though it is a loan?
No and be careful if this is your intention. Declaring to your mortgage lender that you are receiving a gift when it is actually a loan is mortgage fraud. There is however nothing to stop parents gifting money to their children and then for the children to gift the money back at some future date. Your parents have no legal right to call upon the repayment of their gift and the children could choose not to repay the money because they have either fallen out with their parents, or they simply cannot afford to pay.
These kinds of unwritten agreements can cause arguments in families, especially if their are two children and only one is given the gift.
A gift to their child, not their partner
There can be circumstances when the intentions between parents and children can change and one of the main contributing factors is marriage. Parents who are unhappy with your choice in life partner may not want to see their gift being shared with your new partner. Often this can lead to parents seeking repayment of their gifted deposit. This makes it even more important to have something in writing to state what the intentions were for the deposit when it was given.
In circumstances where the money paid was a gift, a parent cannot make claim to it, however they can advise their child to protect their gift from their partner. During the conveyancing on the purchase, the child and their partner should enter into a Deed of Trust which can clearly state the legal owner of the gift as the child separate to their partner. Deed of trusts are very common for couples who joint own a property and want to protect the interests separately to each other until they get married.
If the relationship were to break down then on the sale or transfer of the property, the ownership of the gift would be shown as the child's money and as such the partner would not have a claim to it. Read more about Deeds of Trust here.
Do you need an agreement drafted?
For clients who want to agree terms with their children we provide a detailed shared ownership agreement that is tailored for this relationship. It can be drawn up either for setting terms for the repayment of a loan at set times, or for the protection of the gift given to your children. We have a wide selection of agreements that can be used to handle this kind of arrangement.
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Can you repay a mortgage gift?
There are some mortgage lenders who will allow a mortgage gift to be repaid on the sale of the property.
Can you get a gift from anyone?
Mortgage lenders are more likely to accept a gift from parent to child. Fewer lenders allow Grandparents and even fewer brothers and sisters. The least accepted gift is from friends. The reason that parents are more commonly accepted as gift providers is because of their relationship with their children and the common acceptance that parents give money to their children. Any other person providing a gift, in the mortgage lender's eyes, is most likely going to expect to be be repaid at some point in the future.
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