If you’re ready to turn your idea of building a dream home into a reality, getting a self-build mortgage is a good way to finance it. But what happens if you can’t meet the high deposit requirement for this type of funding? If you have a family member who’s willing to help you, can you use a gifted deposit for a self-build mortgage?
What is a self-build mortgage?
First, we’ll explain what a self-build mortgage is and how it differs from a standard residential mortgage. With a standard mortgage, the loan is released as a lump sum when you complete the purchase of a property. For a self-build mortgage, however, the lender releases the funds in stages throughout the construction process, typically four to six times. These staged payments are made in advance or in arrears, with the latter being more common and usually having a more competitive rate.
A larger deposit is required for a self-build mortgage and a higher interest rate is typically charged than for a standard mortgage. This is because it poses a higher risk to the lender. Generally, though, the lender will allow interest-only payments during the build. This helps to keep your outgoings lower, making it easier to manage your cash flow. Also, you’re only charged interest on the funds that have already been released.
How much deposit do you need for a self-build mortgage?
Deposit requirements for self-build mortgages typically start at 25% of the total project costs. Some lenders will accept lower amounts, such as 20%, while others will insist on much higher deposits of 40%.
The amount you need to pay depends on your affordability, the lender’s criteria, your credit rating, the complexity of your project, your experience in this field and whether you have additional security. For example, if you already own the plot of land, the lender may accept a lower deposit or even consider the land in place of a deposit.
What is a gifted deposit?
If you’re struggling to save an adequate deposit for a mortgage, there are ways to get help with this. One of these is for a family member to help you out with a gifted deposit.
This is a sum of money that’s given to you to cover some or all of your deposit by a family member, partner or friend. The funds must be given as a true gift rather than as a loan that you’re expected to repay at a later date. Who can gift you the deposit depends on the lender as each one has its own criteria.
Can you use a gifted deposit for a self-build mortgage?
Yes, you can use a gifted deposit when applying for a self-build mortgage. Most lenders prefer this to be given by an immediate family member but others are happy to accept funds from other relatives or friends.
To confirm that it’s given as a genuine gift, a gifted deposit letter must be completed and signed by you and the person gifting you the funds. The lender also has to carry out anti-money laundering checks. This includes needing proof of where the funds have come from and copies of personal documentation from the person gifting the money.
Are there any alternative options for the deposit?
As mentioned above, if you already own the plot of land, you may be able to use it in place of a deposit, depending on the lender. If you already own a home, you may decide to sell it to generate the funds needed for a deposit and live in temporary accommodation while building your new home. Alternatively, if you own a property that has equity in it, you can consider remortgaging it to raise the deposit.
Another option is to take advantage of the Help to Build: Equity Loan scheme. This is a government-backed scheme that’s available for self-builders in England. An equity loan is provided to help you fund your project, ranging between 5% and 20% of the total estimated costs. In London, equity loans of up to 40% are provided.
Eligibility for this scheme applies up to a maximum spend of £600,000, including the land if you don’t already own it. The maximum that can be spent on the build is £400,000. Help to Build allows for a smaller deposit requirement of 5% and you need to have a mortgage offer from a lender who’s registered with the scheme.
Get expert advice on your deposit for a self-build mortgage
Our mortgage brokers know which lenders accept gifted deposits for self-build mortgages and their varying criteria. They can ensure that you have prepared the correct documentation to prove that the funds are not a loan and for anti-money laundering compliance. That way, you can avoid delays with your application or potential refusal by lenders.
Our brokers can also ascertain whether you can use your gifted deposit alongside other assets to maximise your borrowing potential. Give us a call on 01322 907 000 to speak with our specialist mortgage brokers who are well-versed in self-build finance. They are here to help you secure the best deal for your situation.