Bank of Mum and Dad and gift letters: what you need to know

A significant share of first home buyers are turning to the Bank of Mum and Dad for help, but being gifted money for a deposit is not without its risks.

With interest rates sitting at their highest point in 12 years, the cost of rent edging up and property values returning to record levels, it's fair to say that first home buyers have their fair share of financial challenges to navigate.

It won't come as a shock then to learn that many are turning to their families for support.

Two in five first home buyers (42%) were found to have received financial support from their families to purchase a property according to recent research published by lenders mortgage insurance provider Helia, with most support (60%) coming in the form of a contribution towards a deposit.

While the act of providing financial support in the form of a gift is a noble one, it can throw up potential complexities: both during the mortgage process and further down the track.

So what do borrowers and their families need to know about gifting, gift letters and the other financial support options available to them?

How do lenders treat gifted deposits?

As part of the mortgage application process it's standard for lenders to run a fine-tooth comb over an applicant's savings history, current employment and any debt they may have in order to make sure that they're fit to service the loan.

So even with a healthy deposit contribution from the Bank of Mum and Dad, borrowers will still need to approach the mortgage process with a healthy financial position - including their own record of savings.

However, Shaun Lordan, the general manager of product lending at Lendi Group, says lenders have become less stringent on the savings front recently.

"It used to be a little bit more arduous where borrowers would need to show an incremental increase in their savings over a three-month period along with the gifted money," he says.

"But the big thing we've seen in the last six months is that lenders have been bringing down the barriers to allow gifting. We've seen a myriad of lenders move from asking to see genuine savings over a three-month period to only requesting one month's worth of savings."

What is a gift letter?

Given the price of property these days, many deposits will be in the six-figure range. That's a significant amount, and lenders are actually obliged to ensure that the money has come from a legitimate source - including any gifted money.

That's where gift letters come in.

A gift letter will typically need to be signed by the party providing the financial support stating that the gift is actually a genuine gift (and not a loan) and, in some cases, it will also need to include some basic information should the lender need to get in contact.

As Lordan explains though, the exact requirements of a gift letter differ from lender to lender.

"With some you'll be able to draft your own letter which a mortgage broker can give you advise on in terms of the format. For instance, here at Lendi Group, we have templates for borrowers to use. Other lenders will have their own template.

"Lenders will also ask for details about the donor which can range from a name, email and phone number to actually requesting that the note come directly from the donor themselves. It just depends on the level of scrutiny that each lenders' policy has."

Are there risks to gifting a deposit?  

One of the potential downsides to gifting money towards a property purchase is not necessarily one that many think of in the moment.

Rather, it's an issue that can crop up in the long-term if there's a relationship breakdown between whoever received the gift and their partner or spouse.

Brendan Herbert, principal lawyer at law firm Macpherson Kelley, says that the unfortunate reality is that these situations aren't unusual and that gifts can complicate things.

"Whether the relationship is de facto or a marriage, breakups are a reality of life and in any family law negotiation or dispute, whether it's in court or not, the property - being the assets and liabilities and the financial resources of the parties that are available for division - will be identified and assessed.

"So at that point, if the monies that have been advanced or the property that's been acquired with those monies is considered a gift, it would be included in the balance sheet as property that's available for division between the parties."

While Herbert says that the outcome of each case will ultimately rest on its own facts, if a family wants to avoid gifted money being shared with someone it wasn't intended for, then an alternative option could be better suited.

Are family loans or financial agreements safer options?

One option is for the money to be given as a loan which, Herbert says, would mean that if a separation occurred it would be listed on the balance sheet as a liability.

A genuine family loan intended to be paid back could impact someone's ability to take out a mortgage with a traditional lender though, so it would be worth weighing up the pros and cons.

Another option is a Family Law Act Financial Agreement which outlines how any assets would be divided in the event of a couple separating.

"An inter-family loan or gift can be recorded in a Family Law Act Financial Agreement which can be enforced in the family law courts, and it can deal with all property rights of the parties, or it can be limited to some financial issues such as gifts, loans or inheritances," Herbert says.

"If the parties separate, the financial agreement could provide for the parents to be paid out or for the intended recipient to retain the money, or the property purchased with it, as part of the settlement.

"The family law court would be effectively barred from making any orders about that loaned money, so that gives total protection."

Herbert recommends employing an experienced lawyer in the case of a Family Law Act Financial Agreement to ensure that it's prepared properly.

"For the financial agreement to be binding it needs to be drawn up by a lawyer with experience in family law matters. The ones that fail usually do so because it's fairly obvious that no legal advice was given, that technical requirements weren't complied with or that there was fraud or duress involved."

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