Gifted deposits for home loans: How do they work?
Saving up a deposit is one of the largest obstacles to purchasing a home, which is why many parents step in to help their children out. If you’re in a position to do so, gifting a deposit can be just what your child needs to get their home loan application over the line.
How do gifted deposits work?
If your parents have the means to do so, they can help you get your deposit over the 20% threshold preferred by banks by gifting you a lump sum of money. This can come from money they have saved up, assets they have sold, or superannuation payouts they have received.
How do I write a gifted deposit letter?
The bank might request a signed statement from your parents confirming the funds were gifted to you unconditionally. This is so the bank can be sure that the money wasn’t given to you with the expectation that it will be repaid, as this would cut into your ability to service your mortgage.
If you’ve been asked to provide a gifted deposit letter, you might need to provide the following information:
- The names of the people giving and receiving the gift
- The sum gifted
- A declaration that the sum is unconditional, non-repayable and non-refundable
- A declaration that the gifter does not hold a stake in the property
What if the deposit is loaned instead of gifted?
There’s a big difference between money that was gifted to you and money that was borrowed. If your parents expect you to repay the money, your bank will consider this a financial commitment — much like it would a credit card or personal loan.
When it’s determining your serviceability, your bank will add the money you owe your parents to your list of liabilities. If it’s a substantial amount, it could ultimately affect the amount of money the bank will be willing to lend you.
Who is allowed to gift a deposit?
Generally, banks will only accept a gifted deposit if it comes from your parents, but they often make exceptions for immediate family members such as siblings, grandparents or spouses.
If you have been gifted a lump sum from someone in your extended family, such as an aunty or uncle, you might need to provide some details about the nature of your relationship (for example, if they were an important figure in your life). This is to convince the bank of your closeness and the likelihood that the money was given unconditionally.
Can I add my own savings to a gifted deposit?
Of course. Lenders like to see a larger deposit as it reduces your risk profile in their eyes, potentially allowing you to borrow more and access better rates.
On top of that, adding your own savings to funds you were gifted provides evidence that you’re disciplined enough to set aside money regularly. By itself, a gifted deposit won’t tell a bank much about your ability to save money or service a mortgage.
Are there other ways parents can help their children buy a home?
There are plenty of ways parents can help their children purchase a home, and not all of them require parting with large sums of money. These include:
Become a guarantor: This is when parents (or other family members) use the equity in their home as security for their child’s loan. As a guarantor, you’ll be liable for the loan if your child is unable to satisfy their repayment conditions. It’s a significant decision, so make sure you seek independent legal and financial advice before you agree to anything.
Take out a joint mortgage: Co-borrowing with your child means combining your incomes and committing to making regular mortgage repayments, with each party ultimately owning a share of the property. This can increase your borrowing power, allowing you to set your sights on more expensive properties.
Of course, if you already own a property, your child may no longer be eligible for any stamp duty exemptions that would have been available had they purchased the home without your help. This can bump up your upfront costs by tens of thousands of dollars.
Provide rent-free living: Letting your child move back home (or stay for longer if they haven’t yet left) can eliminate one of the biggest drains on their finances and help fast-track their savings goals.
Frequently asked questions
Do I have to pay tax on a gifted deposit?
In Australia, cash gifts are not considered income and are generally exempt from tax. Of course, this assumes the cash was gifted voluntarily, and the donor does not materially benefit or expect anything in return.
What are the downsides to gifting a deposit?
The main downside to gifting a deposit is obvious: you’re parting with a large sum of money that could be invested to produce a return or used to fund your lifestyle. If the money is given unconditionally — that is, without any interest conditions or expectation it will be repaid — you could be looking at a reduced standard of living, especially in your retirement years.
Do I have to pay Lender's Mortgage Insurance?
That depends on the size of your deposit. If it’s less than 20% of a property’s value, your bank will require you to pay Lender’s Mortgage Insurance (LMI), which can add thousands of dollars to your upfront costs.
Importantly, LMI protects your lender in the event you are unable to service your loan; it’s not in place to protect you. Banks require it because borrowers with high loan-to-value ratios are considered riskier.
What is a gifted deposit letter?
If all or part of your deposit was given to you by a family member, your bank might request a gifted deposit letter. This is a letter from your parents assuring your bank that the funds provided were done so without expectation of repayment.
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