Using someone else’s money

THE QUESTION

I want to purchase a property for a potential serviced apartment; it also works at 8.5% yield as a Buy-to-Let.

I had a JV partner who was going to put in the deposit with the mortgage in my name.  My mortgage broker has informed me that no lender will accept a deposit unless it is from a family member.  I have not heard this before, is there any way round this?

THE ANSWER

This has been standard lender practice for some time.  BTL lenders prohibit you from borrowing the deposit, their criteria states that deposit must come from your own savings.  You cannot even borrow from family, it must be a gift and the gifting family member must not have any interest in the property.

They insist that you use only your own cash for deposits and they will drill down by requesting bank statements until they are satisfied it is your own money or decline to lend when they discover it is not.

There are several reasons for this stance.  Lenders consider it illogical that someone unrelated to you would gift thousands of pounds to you, so you can buy a property.  Only the very small minority of educated property investors would even think of such a thing.  Such people are so unusual that lenders consider this suspect behaviour.

This criteria exists precisely to prevent borrowers doing something the lender views as a risk to their security.

Their objective on this point is diametrically opposed to yours; they want to restrict mortgages to the amount of cash borrowers have, whilst you want to use funds from any other source to buy more properties than your own cash allows.

One of the accepted workarounds is that your JV partner puts the property and the mortgage in their name; this complies with lenders’ criteria in relation to the source of the deposit.  You would then draw up a legal agreement on the side, such as a Deed of Trust, which reflects your interest in terms of the monthly cash flow and/or any future equity growth.

There may be other workarounds, but this appears to be the most commonly used.

As a side issue, renting the property out as a serviced apartment will also contravene pretty much every BTL lenders T&Cs as they prohibit both short and long term letting. The only acceptable periods of letting are between 6-12 months, by means of an AST.  If a serviced apartment is your intended use you will need to re-think your mortgage strategy as any BTL lender will not condone renting in this way.

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