I’m quite often asked, “Peter, can I borrow the deposit money for my buy to let, and finance the rest on a buy to let mortgage?”
Or, alternatively, I’ll be contacted by someone who says, “I’m about to buy a property with a buy to let mortgage and I’m borrowing the deposit from my friend/business partner/ JV partner who I met at the local property network meeting”.
Sadly, you cannot do this. By the way, none of this is financial advice, I’m not qualified to give any.
Lenders will not allow you to borrow a deposit.
The only time they will allow a 3rd party to fund the deposit is when it is a Gifted Deposit.
What is a Gifted Deposit?
It is as it sounds. Someone gifts the purchaser the amount of the deposit so they can buy a buy to let property.
For example, if you are using a 75% LTV buy to let mortgage, someone gifts you the 25% that you don’t have.
And if you think about it, this makes the purchase a No Money Down deal for you, using the accepted definition of NMD.
However, there are things we need to know and consider.
(almost) All lenders want the “someone” who gifts you the deposit to be a close relative.
You CANNOT take a gifted deposit from anyone else.
You cannot take the gift from a friend, or a business partner, or a JV partner if they are not a qualifying family member.
All lenders have slightly different criteria but by and large we are only talking about parents and grandparents, although a very limited number of lenders may allow an uncle or aunt, or a brother or sister.
The second thing to not is that this is a GIFT. It is NOT a loan.
There is an expectation (and a legal requirement) that you will not repay the gift.
If you do, by definition, it then becomes a loan.
So your solicitor will ask you, the one receiving the gift, to sign a letter confirming that it is a gift and that you will not repay it.
Of course, in reality, it’s not unknown for some borrowers to later repay the ‘gift’. Clearly I cannot condone this, but we all know it happens.
If you think this route might help you, the good news is that some lenders will allow more than one gifted deposit per transaction.
.
For example, The Mortgage Works will consider two gifts per application, for example a gift from a mother and father AND a gift from a grandfather and grandmother, as long as the donor is resident in the UK, and the funds originate from within the UK.
By the way, that’s an important point. Almost without exception lenders will want the funds for the gift to originate in the UK.
What if you want to borrow the deposit into a limited company?
OK, there could be some mileage in this but it’s not that different from what I’ve already described.
Let’s say you set up your limited company to hold your properties.
And you want to borrow the deposit from your friend Bob.
Well, simply put you can’t. You can’t borrow the deposit from “a 3rd party”.
But, if Bob were to be a director of the company, Bob can make a Director’s loan to the company.
Now, from your point of view you’ve managed to borrow the deposit, but Bob is now a central part of your limited company.
Does that matter? Well depends on what you wanted to achieve and how far you wanted Bob in your business.
There’s any number of things that could happen like Bob is with you for years, or perhaps you agree with Bob that you’ll refinance the property BRR style and pay him back as soon as possible, on the condition or understanding he then resigns his directorship. And if he has shares, his shares pass to you, although there could tax consequences of Bob “selling” you his shares (you’d need to check all of this with your accountant).
But if you need to get started, and this is the only way you can get started, this could be a way ahead.
And of course, you don’t have to have just one limited company.
If you have a number of Bobs, you could set up a limited company per Bob and just have one property in each company.
Or you could have as many companies as there are Bobs, and have multiple properties per company, depending upon what the deal is with each Bob.
There will be extra costs of having multiple limited companies, and you’d need to make sure the figures stack, but in some circumstances it could be worthwhile.
The Official View – What My Broker Says
Most lenders don’t like customers borrowing for a deposit (family gifts are fine) as they feel this increases their risk element if the market heads south at some stage – they like to see borrowers have “skin in the game” (hangover from 2008 crash when a lot of lenders realised the deposits they thought borrowers contributed didn’t actually add up to much & in some cases was wiped out by the fall in values at this time).
Ltd Co deposits if financed via a Director’s loan are absolutely fine although some lenders will factor in a repayment (whether one is being made or not) which is then deducted from the overall rental assessment – most however don’t apply this draconian requirement thankfully. The Directors Loan will still have to be verified & if this is being funded via borrowings lenders will want to ensure the monthly repayments are deemed affordable (in their eyes!).
All lenders will want to see verification of the deposit – this is typically via bank statements for the last 3 months (if any large credit appears then they will ask for what is termed “build up of funds” corresponding statements & they can request statements covering 12 months or longer).
In a nutshell if the client is borrowing the deposit for B2L purchases (other than via Directors Loan to the Ltd Co or a family gifted deposit) this will greatly increase the risk of a decline.
Here’s to Successful Property Investing.
Peter
Peter Jones
(ex) Chartered Surveyor, author and property investor
https://www.ThePropertyTeacher.co.uk
By the way, I’ve rewritten and updated my best-selling e-book, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same.
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