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When a gift is not as good as it looks

When builders offer gifted deposits they are offering to pay the deposits on properties people are buying from them. Builders tend to do this on new developments, with deposits ranging from 5% to 15%. Other incentives can be offered such as cashbacks, payment of legal fees or Stamp Duty or purchase price discounts.

Builders originally used gifted deposits to encourage people to buy the last few unsold properties in a development. But in this competitive world it is common to see gifted deposits being offered on whole developments.

Builders tempt people with the prospect of property values increasing during the build, giving investors a high percentage of equity in their properties from the moment they complete on their mortgages.

And this type of scheme is not only tempting to those who wish to buy property for the longer term. With builders offering large deposits on developments it is not uncommon for larger investors to buy whole developments at a discount, then sell the properties on at full value.

So, is it as good as it sounds? There is a downside. Mortgage companies tend not to like deals with gifted deposits. Lenders would rather see applicants making the financial commitment of a deposit. Few lenders accept gifted deposits without applicants making a contribution.

Some will not allow gifted deposits but will mortgage a property working off the purchase price minus the gift. Others will simply not accept a property where the applicant has been given such an incentive.

There has also been a problem whereby builders inflate property prices and then offer discounts. A property is therefore sold at its true value but investors are under the impression they have been given an incentive to buy. It is therefore important that when a valuation report is being done, the surveyor is made aware of a gifted deposit and asked to comment about this in their report.

andy young is managing director of The Business Mortgage CompanyBut when valuations come back with a lower value, it’s common to see investors going ahead with purchases, putting the blame on the surveyor for downvaluing their property.

Some investors have also been caught out with Stamp Duty. They see the price they are paying as being the purchase price less the deposit. But on the mortgage offer and all the legal documents the purchase price appears as the price the builder advertised the property at, including the gifted deposit. This may take an applicant over a Stamp Duty threshold.

It’s easy to see the benefits of buying properties with gifted deposits. But before anyone goes into such a purchase the true value of the property should be taken into account as well as the availability of a mortgage.

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