Are "gifted" deposits such a good thing?
Brett Alegre-WoodChairman, YPC Group
Hey guys,
Gifted deposits, builder's incentives or builder's gifts are all a part of our industry now but what are implications of using them, and are they as great as they seem?
They definitely serve a great purpose and lots of my clients have used them to decrease their initial acquisition costs but more and more now I am finding that it is better to put the extra money in and secure a better interest rate and mortgage product.
Let's look at a typical property of £100,000. Under a normal deal you would put in 15% plus costs of say 5%. So let's say £20,000 would be required to purchase the property.
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If you used a gifted deposit you would use the gifted deposit of say 5% thereby requiring you to put in only 10% plus costs so your total outlay would be £15,000 or £5,000 less.
Now this may seem like a bargain but now let's consider some of the mortgage products that you can access that offer a gifted deposit versus products that do not allow you to use a gifted deposit.
Accepting Gifts (remember criteria may change and I have not taken into account other factors such as redemption costs, these are correct at time of publishing):
Northern Rock Variable 5.79% with 5% gift.
TMB Tracker 5.99% with 5% gift.
GMAC Variable 5.49% with 5% gift.
Birmingham Midshires 5.09% with 5% gift.
The lowest being Birmingham Midshires at 5.09%
Now see what happens if you are prepared to put in the extra 5%.
Mortgage Express Tracker 4.79%
Irish Permanent 4.99%
So you can see that the rate varies considerably. 4.79% to 5.99%.
So what is the effect on your cashflow?
Let's say you take an £85,000 mortgage. At 4.79% your repayments will be £340 per month. At 5.99% your repayments will be £425. So £85 per month difference. Over 2 years this is an extra £2000 in repayments. Just to save you £5000 initially.
Now obviously if you don't have the initial £5000 to put in then it is better to have a property than not but its worth considering whether you really want to use the gifted deposit.
Now for those of you that are savvy investors you may say surely I get this gifted deposit back when using a property club? The answer is yes so in most cases you will only be putting the 5% gift in for a short period. Obviously this will depend on individual criteria and structure that is allowable.
Live with passion,
Brett Wood
PS. The above figures were correct at the time of printing (I think!). No seriously they are for illustrative purposes only and you should speak with an FSA registered broker before making any decisions as to which mortgage to use. We are happy to give you the details of the people we use.
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