There are many acceptable ways to fund a mortgage deposit and you’re not limited to personal savings, like many prospective borrowers wrongly assume. Read on to find out what other deposit options are available to help you get a foot onto the property ladder.
This article covers the following topics…
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Why do I need to prove where my deposit is from?
In the UK, every mortgage borrower must disclose the source of their deposit. Lenders and solicitors have strict anti-money laundering regulations and guidelines in place to ensure mortgage deposits are funded by legal, legitimate sources.
Where your deposit has been sourced from is a vital piece of information in the mortgage application process. You’re likely to have a mortgage application declined if your deposit originated from a non-approved source. Therefore it’s important to be honest on your application from the offset to ensure everything goes through smoothly.
What’s more, you will also be asked for proof of the source of your mortgage deposit funds, and lenders and/or solicitors will carry out extensive checks to confirm the claims you have made about its origin.
Evidence of the source of your mortgage deposit comes in various forms, from a review of bank/savings account statements, signed contractual agreements, and particular forms of certification, to name a few.
The specific proof you have to provide will depend on where the funds have come from, and we’ll be covering this in more detail later on.
What are acceptable forms of mortgage deposit in the UK?
While all mortgage lenders have different requirements as to what they will and won’t accept as a deposit, certain forms are deemed more trustworthy than others.
As a result, buyers funding a deposit by these means will have a wider range of lenders to choose from and access to more competitive rates. Of course, individual circumstances such as the buyer’s credit history and the property’s loan to value (LTV) ratio will also be considered alongside the deposit source.
Deposit sources that are nearly always accepted
Every lender is happy with a deposit funded by personal savings, although some may require proof in the form of bank/saving account statements so there is evidence of the increasing balance over time.
The sale of a house
Usually, there are no problems with providing a deposit with proceeds from the sale of a previous home, as long as the property proceeds are not undercharged by someone else. There must also be evidence of these funds in your bank account at the time of completion.
Capital from another property
If you own a large enough share of your current property or your home has increased in value, you may be able to release equity as a deposit for a second mortgage and take out a larger mortgage to cover the two.
This doesn’t tend to be a problem, but lenders will need evidence that you will be able to keep up the repayments for the larger mortgage.
Most lenders are happy to accept an inheritance funded deposit but will require a letter from the executor detailing the amount you are receiving, and evidence of the funds in your account.
Forms of deposits that are widely accepted
Gifted deposit from close family members
Lenders tend to be happy with gifted deposits from close family members such as parents, grandparents and siblings, and will require a signed legal agreement from all parties detailing the terms and value of the gift.
The sale of other assets
Deposits funded by the sale of assets such as cars, boats, valuable memorabilia, artwork, or anything other that is able to be sold legally are usually acceptable forms of deposit, provided it is legitimate and you can present evidence of the sale.
Sometimes accepted by lenders
Gifted deposits from more distant relatives
Gifted deposits from more distant relatives can be viewed with caution by lenders due to the associated risk.
While close family are not a problem, gifts from more distant relatives such as aunts, uncles, step-parents or cousins may be declined. Whether the person is related to you by blood can also impact eligibility.
Deposits sourced from savings overseas can be a tricky one as it can be difficult for lenders to trace the origin of the cash and to confirm there is no risk of money laundering.
Some lenders are more flexible. If, for instance, the funds come from an established bank account and can be legitimately traced.
Gambling funds may be accepted without any issues, but lenders may be hesitant if gambling is a regular occurrence.
Some may want to examine your bank statements and deduct gambling income from your total available income, which may considerably impact affordability.
For more information about getting a mortgage based on gambling income, get in touch and we’ll introduce you to a broker who can help.
Rarely accepted forms of deposit
They include the following…
Gifted deposits from friends
Gifts from friends or family friends are regarded as less trustworthy than a gift from a close family member.
Due to the associated risk, very few lenders will consider approving this, but there may be a few that will, and it will help your case if you contribute some of your own cash to prove your investment.
Gifted deposits from an employer
Gifts from a third-party such as an employer are not usually accepted due to the risk of money laundering and fraud.
For lenders that will consider accepting under these circumstances, expect extensive due diligence checks to be carried out. These checks will scrutinise the source of funds and may include ID verification checks on the donor.
Deposits sourced through taking out personal loans or other forms of unsecured borrowing (such as credit cards and overdrafts) are generally not accepted by most lenders because you’re borrowing money to borrow money, which won’t fill them with confidence about your financial position.
Depending on your circumstances, however, a handful of lenders will consider accepting, including some mainstream mortgage providers.
Cash tends to be a big no-no from many lenders. Cash deposits into an account that cannot be sourced generally cannot be used for a deposit, and can even taint the whole account, meaning that none of the money in that account can be used for a property purchase.
How to prove the source of your deposit funds
The way you will need to prove where you deposit has come from will vary depending on the source of the funds. For example, if you’re using personal saving, most lenders will want to see six months’ worth of bank accounts to show the funds building up over that period of time.
If your deposit source is inheritance, a certificate from the executors along with your bank statements should suffice.
Read on to find out more about how to evidence mortgage deposit funds from various different sources.
Savings are regular (usually fairly small) payments into a savings accounts from an income such as a salary, pension or an annuity.
The best evidence you can provide for this is six months’ worth of bank statements which display regular in-payments from your employer/pension/annuity, and the money slowly growing in your bank or savings account.
If you have multiple bank accounts, then you should provide 6 months’ statements for each of these accounts.
Selling property or other assets
If you’ve received a lump sum from a sale of a previous property or other assets such as a car, boat or other legal sources, you should provide evidence in the form of ownership documents, alongside a copy of your bank account statement showing the money being received from the solicitor or buyer.
If the cash is coming from a property, you should also provide a copy of the completion statement once the sale has been finalised.
Capital from another property
If you are releasing equity from an existing property to fund the deposit for a second one, you will not be required to provide evidence if you’re negotiating a larger mortgage to cover both properties with the same lender. They will already have full visibility of your situation.
They will, however, require proof that you’re able to afford the repayments for a larger mortgage, which they will assess by calculating your debt to income ratio.
A certificate of deposit inheritance will need to be provided by the executors if you’re funding a deposit in this way.
This document will need to state how much you are receiving as a beneficiary, and you will also need to provide a copy of your bank statement that shows the sum has been transferred from the solicitor or executor’s account into your own bank account.
For any form of gifted deposit, your solicitor will require a legal agreement which confirms that the money being provided is a gift, and that the donor has no rights over the property. It should also detail the value of the gift, and be signed by all parties.
Provided you are using funds which come from an established bank account or similar overseas account, it is far easier for solicitors to trace the origin of the cash and rule out any suspicions of fraudulent activity.
Proof can be provided in a similar way to personal savings in the UK, with the buyer providing copies of a bank/savings account statement displaying regular in-payments for savings (the sources of which must again be traceable).
If you’re using gambling winnings as a mortgage deposit you will need to provide a receipt confirming your winnings and the amount, as well as a copy of your bank statement showing the incoming payment from the gambling company.
If your winnings were in cash, however, you will struggle to prove the source of your mortgage deposit which could severely inhibit your chances. See below for more information on the problems with cash deposits.
When it comes to cash, most solicitors are very wary because it is almost impossible to prove the true source of funds.
Even if there is a legitimate way to explain the cash deposit, without proof, it will be very tricky to be approved for a mortgage.
For the handful of solicitors that will accept cash, you are more than likely to find that there is a limit to the amount they will accept (typically no more than a few hundred pounds).
If you have a large sum of cash in your account which hasn’t been sourced by any of the options we’ve covered, either speak to a solicitor or get in touch to speak with a whole of market broker who will discuss your situation in more detail and connect you with the right lender, should you choose to proceed.
What’s the difference between an exchange deposit and a mortgage deposit?
You may have heard the term ‘exchange deposit’ being bandied about and are now in a panic wondering whether this is something extra you’ll have to cough up.
Don’t worry – the exchange deposit is merely a part of the final deposit amount, payable at the point of exchange. It amounts to 10% of the property’s purchase price and is non-refundable in the unlikely event of the deal collapsing at this late stage.
Like we said, this 10% forms part of the final deposit amount and is not something you have to pay in addition. For instance, if you’re putting down a 15% deposit, you will initially pay 10% of it to serve as the exchange deposit and the other 5% upon completion.
The only exception is if you have a 95% mortgage, in which case the full 5% deposit is payable at the point of exchange.
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