What is the difference between a gift of equity and a gifted deposit?

If your parents or a close relative are contributing to the deposit for your property purchase, it’s known as a gifted deposit. For this to apply, there should be no obligation for you to repay the amount that’s been gifted. A gifted deposit home loan will only be considered after the lender has verified all the required documents. Additionally, the lender requires a gift letter from the people giving you the gifted deposit. 

• There should be no expectation of repayment of the home loan down payment gift amount. If your parents or relatives are expecting the money back, it’s regarded as a loan.
• You’ll have to provide a gift letter to prove the authenticity of the gifted deposit and that it’s a gift rather than a loan.
• Lenders are more likely to approve gifted deposit mortgages when the money comes from parents. However, if a close relative is involved, the lender will examine the relationship between you and the relative.
• Unlike other countries, there is no additional gift tax applied to gifted deposit mortgages.

• For the gift of equity to be valid, the sale must happen between you and either your parents or close relatives. The most common occurrence is when parents sell their residence to their children.
• The sale price of the residence must be lower than the market price of the property.
• The sales process can’t involve any physical exchange of cash. The ‘gift’ amount is the difference between the sale price and the market price.
• You’ll be responsible for paying the legal fees to draw up the necessary contracts.

You can’t necessarily compare the two gift types as they’re used in different circumstances. The gift of equity is only applicable if close relatives are selling their residence. On the other hand, a gifted deposit helps you with a deposit for an entirely new property. Both methods help you pay the deposit for your first home. 

However, before considering the option of a gifted deposit mortgage, you must check with your lender. Even though it’s widely accepted, there might be some exceptions. You need to show proof of income in both cases, and you’ll need to have 5 per cent of the loan amount in savings before applying. 

Yes, you can combine the gifting methods, but this might raise some eyebrows. Your bank accounts may be scrutinised by lenders to check compliance with taxation and other regulations.