In this article we go through what a mortgage deposit is, where your mortgage deposit can come from, what your lender looks for and more.
Getting a deposit together is one of the biggest and most expensive challenges of buying a property, especially if you want a mortgage for a first-time buyer. Unless you have a high income or generous family members who'll gift you the money, you'll have to save hard. Thankfully there are ways to make this process a little easier and products out there that can help.
Under strict anti-money laundering regulations, every person taking out a mortgage must explain to their lender and solicitor where they got their deposit and how they built it up. This ensures that each borrower has obtained their deposit from legal sources.
What Is a Mortgage Deposit?
A mortgage deposit is the fund you pay upfront when purchasing a property. In most circumstances, your deposit will be at least 5% of the property's total value. However, with a bigger deposit, you'll start with more equity in the property, and you'll need a smaller mortgage. You'll also have a wider choice of lenders and access to better deals and lower rates.
For many house buyers, their deposit comes from selling their previous property. However, if you’re a first-time buyer, you'll probably find you have to save up for your deposit and open an ISA account and/or look at options such as family springboard mortgages.
Is the Money Legitimate?
Your mortgage application is still pending when you pay your deposit, and your lender will likely ask you to prove where your mortgage deposit came from. You must provide them with proof of how you obtained your deposit - such as bank statements, statement of accounts and/or a gifted deposit letter from the person who gave it to you.
Your lender will want to see that the funds for your deposit came from a legitimate source. If your deposit has been funded with a loan, your lender may consider it too risky, depending on the source and repayment plan. Mortgage providers are looking for honesty, so if you can prove how you got the money for your mortgage deposit, this will help support your application.
Where Can My Mortgage Deposit Come From?
Every mortgage lender and solicitor will ask you where your deposit came from. While it's a legal obligation for them to ask you, they will also use the information to help them assess your financial profile. Acceptable sources of deposits for mortgages will vary according to each lender but typically includes the following:
The most common source of mortgage deposits is personal savings, especially for those buying their first home. Some lenders will ask you to provide evidence of your income, such as payslips or bank statements, to check the legality of your deposit source.
You may also need to provide:
One month's bank or building society statement, or a passbook from the past 3 months
- A statement showing the current value of your ISA
You may have to provide additional evidence if your deposit funds have been in your account for less than a month.
Most lenders will usually accept money from an inheritance as a deposit source without major issues. However, you'll still need to provide evidence, such as confirmation from your solicitor, on the amount of money you've inherited. You'll also have to provide a bank statement showing the transfer of the funds.
Some parents help their children get on the property ladder by giving them the money towards a deposit for a home. Financial gifts are generally considered an acceptable source of deposit for mortgages, although the funds will need to meet certain criteria.
Lenders will usually accept financial gifts from family members such as parents, grandparents, siblings, aunts, uncles, and stepfamily. However, in some circumstances, some lenders may recognise a gift deposit from someone not related to you, such as a close family friend.
The person gifting you the deposit will likely have to sign a statement agreeing that they are gifting the money and don't expect repayment. There are strict criteria for gift deposits, such as:
- The deposit can come from a donor abroad however this will require more scrutiny than a donor living in the UK
- Money that's been in your account for longer than 12 months is considered savings not a gifted deposit
- You can typically only have a maximum of 2 gifts per mortgage application
Some mortgage lenders will allow you to fund your deposit with a loan from your parents, although they prefer gifted deposits. If the money has to be paid back, mortgage lenders will want to know the details of this arrangement. If you're required to make monthly repayments on the loan during the mortgage term, this may affect mortgage affordability. The lender is likely to ask for a letter confirming the loan details, including whether monthly repayments on the loan are required and if the parent expects to have an interest in the property.
Sale of Property
It's common for buyers to use the proceeds from a property sale as a deposit to secure their next property. Lenders are usually satisfied with this. However, they will require evidence of the sale and will want to evaluate any charges on the property. For example:
- The address of the property
- Confirmation from your solicitor that your deposit is coming from that property sale
- Details of how the funds are to be released
- Memorandum of sale
Sale of Other Assets
Money sourced from selling other valuable assets - such as jewellery, boats, or cars can be used as a deposit with most mortgage lenders. However, you need to provide evidence of the sale to demonstrate that the money has come from a legitimate source.
Using Your Parents' Home as Equity
Some lenders will accept deposits from raising capital on your parents' home. This is usually via a springboard or family assist mortgage. However, they will want to make sure that your parents fully agree, understand the risks involved, and are not being coerced into it. Whether a lender accepts this source of deposit may also depend on your parents' ages and how big the mortgage is on their own home.
Builder's Gift Deposit
Some property developers offer incentives such as a Builder's Gift deposit, a type of gifted equity mortgage incentive. Most lenders are willing to accept up to 5% of the purchase price as a Builder's Gift. It will need to be matched by 5% of your own funds. However, you may find that your choice of mortgages is limited. A larger deposit will give you a wider choice of mortgage type, lender, and interest rate.
Proceeds from Gambling
Some lenders will accept a big win from gambling as a deposit. However, they may have issues if you gamble regularly. It's not uncommon for lenders to check bank statements and class gambling withdrawals as monthly commitments, regardless of how frequently you win. Deducting these regular outgoings from your available income will influence your affordability.
Sale of Investments
You may be use money from the sale of your investments – e.g. stocks and shares, bonds, wines, etc. The lender will require a financial statement confirming the value of your investments and cash flow statements showing the date and time of each transaction.
Where Can't My Mortgage Deposit Come From?
Lenders don't accept some sources for a mortgage deposit. Here are a couple of examples.
Most lenders will not accept unsecured borrowing - such as personal loans or credit cards, to fund a deposit. Any unsecured loans you have will impact your affordability. The money borrowed to fund the deposit will need to be repaid every month, increasing your expenditure and the risk of defaulting on your mortgage. You may find that a few lenders will accept unsecured finance as a deposit source, but you'll have limited mortgage options.
Most mortgage lenders will not accept cash as a mortgage deposit due to concerns over traceability and money-laundering concerns. If you've acquired a large sum of cash that you want to put down as a deposit, it’s best to seek legal advice to understand your options before applying for a mortgage.
Most lenders don’t like and won’t accept deposits that have come from cryptocurrency because of its associations with illegitimate practices.
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