AIBU to consider borrowing a house deposit from a friend temporarily?

[Borrowingfromafriend]

We’re looking to buy a property and need £200k for a deposit. I have quite a bit more than this in equity in another property however, this will take a while to be ‘freed’ up and I need to move ASAP if I want this property.

A friend has suggested borrowing the £200k from her (she has a net worth of £50m+ just to put in perspective - this isn’t her entire life savings or anything). How would we go about this for a mortgage? Would it even be feasible? I would pay her back in full as soon as the other property sells.

I said that it’s quicker than taking out equity from another property.

The loan from a friend is much cheaper and easier than securing a bridging loan.

No - she just owned and sold an incredibly successful business!

If your friend has a Net Worth of £50 million, does she not have access to financial advisors who can tell her if that is feasible for you?

If it was a loan she’d need to sign deed of subordination. If a gift then a declaration. The lender would want to ensure she has no claim on the property. Some may not like it as it could appear you have no ‘skin in the game’ and could just walk away. Some lenders would only accept your deposit being gifted by immediate family. A bridging lender might take the equity in the property you’re selling and bridge your purchase that way. But best to speak to the lenders / brokers direct.

It isn't easier. A bank will go "RED FLAG RED FLAG RED FLAG"

It's not a gift. It's a loan and will be considered as such for the purpose of your mortgage application.
Gifts are no issue. Loans will be a different matter as it will affect your affordability assessment.

How are you paying it back?

How? You could remortgage in less than a week. You wouldn’t be anywhere near being able to exchange on a purchase in that time.

I'll take it ! But seriously I don't think this is allowed legally. It would have to be declared as a non returnable gift for the mortgage purposes and that puts you in all sorts of murky waters.

Less than a week ? Where ? I remortgaged in March and it took 2 months

Can she buy the house jointly with you? And you buy her out further down the line ?

If in doubt get it in writing.
Applies to both parties.

I would take it and be grateful you have such a lovely friend. If you draw up a loan agreement then see if she would be willing to extend the loan repayment to 18 months instead of a year if there could be a problem getting the property sold. It will give you some extra breathing room and if you sell quickly you can repay early. Just in case buyers pull out etc. a loan agreement will
protect the friendship too as you will both know where you stand.

The loan provider will take the monthly repayments to your friend out of your disposable income, so it may affect the amount you can borrow - this would apply to any loan, not just one between friends.

What would happen if you died, lost your job, or were otherwise unable to pay off the loan from your friend?

If your deposit is £200k, the house you are buying must be £££ - if you did die, would your friend have a legitimate claim for her money to be returned by selling the house? And if the value of the house were to drop, so that most of the value would be in the £200k with not much left over, what would this mean for any dependants or beneficiaries?

What would happen if the house burned down?

What would happen if you and the friend fell out?

Would your friend be looking at this as an investment and expect the loan to be returned with interest, or as a proportion of the value of the house if the house increases in value?

I could go on, but in summary, it's really not a good idea.

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The Issue you will have is that gifts from non family members are viewed with scepticism. Your friend would need to declare it’s a gift (which it’s not) and even if they did that, some lenders would be concerned that it’s actually a loan. Speak to a broker - they will understand the ‘gifting’ rules for the different lenders but I think you might struggle.

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Friend would have to sign legal paperwork to say this a gift, no stake in house and no intention for you to pay them back, they would need to be scrutinised as to the source of the money/ ID checks and the bank may or may not accept.

Would have to be a very good and very trusting friend to do this process. And you will have limited lenders.

We did this (except we borrowed from family rather than a friend). We had a simple loan agreement, including terms for interest on the loan, drawn up. We were clear on the source of the deposit and that it was a loan and had no problem getting a standard mortgage with a high street bank. I don’t think they asked any questions at all. It may have helped that we only needed a mortgage for about 30% of the property value so we weren’t pushing it on affordability at all and we had a clear plan for repayment (selling our existing property).

Won't a "gift" from the friend be classed as income and be subject to income tax?

I wouldn’t really want to inconvenience her by putting that on her.