When you buy a home using a mortgage, you will need to pay some of that money up front as a deposit. When you do this you will also be asked for proof of deposit.
What is proof of deposit?
Proof of deposit (POD) is not, as it may sound, proof that you have paid a deposit. It is simply proof of where the money for your deposit came from. This is because a deposit is not required to come from your own savings and can come from elsewhere. For example, it may come from the sale of or equity release from another property, or be a gift from a parent.
Because the source of a deposit is not always directly from the buyer, banks and lenders need to be sure that the deposit comes from a legal and legitimate source in order to prevent money laundering. This is in line with anti-money laundering regulations that came into effect in 2017.
What deposit sources can hinder a mortgage?
You may now be wondering what kind of financial sources provided with POD can lead to your mortgage application being rejected. There are 2 main examples:
Cash – a lot of mortgage lenders will not allow a deposit to be paid for in cash. This is because it is harder to trace where cash came from, leading to concerns about money laundering, which brings us back to the ultimate intention of POD. If you want to pay your deposit with cash its best to seek legal advice to help you through this.
Borrowing – if the money for your deposit was borrowed (particularly if the source is unreliable or has large interest rates) it is likely that this will not be accepted by a lender. This is because you will then be paying back not just your mortgage to them, but your deposit to this other party, which could easily lead to you defaulting on payments. You would, essentially, be getting a loan on a loan. This would show the lender you cannot actually afford the deposit.
There are also some deposit sources that could go either way depending on the lender you use:
Gifts – a lot of people receive their deposits (or part of them) as a gift from a family member, which is often accepted as long as you have proof that the money was given freely without the intention of paying it back or owning any part of the home. However some lenders will only accept gifts from close family members and so friends or distant/ non-blood related family may not be accepted as POD. Gifts from friends and employers are especially hard to get approved by lenders.
Gambling – if you won the money for your deposit in some kind of bet or game, and you can prove that is where the money came from, this could be an acceptable POD. However the problem comes if you are (or a lender suspects you are) a habitual gambler. This may be a red flag to a lender that any time you gamble you could potentially lose a lot of money and therefore not be able to pay your mortgage.
Overseas savings – though they are savings and some lenders may be more than happy to accept them as a legitimate source for a deposit, remember that because they are held in other countries, it can be harder for British lenders to trace these savings back to their original source. Many lenders are therefore cautious about accepting money held overseas as a POD.
When is POD required and who needs to see it?
It’s worth getting together proof of deposit as soon as you have your funds together, whether you’ve saved up or you’ve got them all at once from another source. The earlier you get proof sorted out the better, as you will need to provide it at multiple points in your house buying journey and to multiple people. Not having POD ready to go will only serve to slow you down.
You may need to show POD to:
Your mortgage lender – before you can be approved for a mortgage you will need to show that you can pay a deposit and so show that you have that money from a legitimate source.
Estate agent – when you want to put an offer on a property you will tell them how much of a deposit you can pay, and so will want to know where the money is coming from.
Your conveyancing solicitor – your solicitor will be in charge of transferring your deposit to the seller come exchange, so they will need to be clear on where this money has come from.
The seller’s conveyancing solicitor – on the other side, the solicitor who the deposit is coming to, which they will then pass on to their clients, needs to know that the money they are receiving is coming from a legitimate source. This will avoid involving their clients in any illegal affairs.
How do you provide POD?
The way you provide POD will depend on the source of the money, so its best to ask your solicitor how you should provide you evidence if your source is unconventional. Under normal circumstances, it should be very easy for you to provide POD with your deposit.
There are the acceptable ways to provide POD for the most common sources of a deposit:
Personal savings – the most common source and the easiest to prove. For POD you will just need to provide up to 6 months of bank statements to show the money being added to or being in your savings account.
Sale of property – for this you will need to show your bank account to show the money coming in from the sale as well as documents showing you owned the property. You may also need the completion statement if the sale is finished.
Equity release – this is the easiest POD to provide as you should be using the same lender to buy a second home with equity from the first, so they will already be aware of the situation and won’t need any proof. You will just need to be able to show them that you can keep up with repayments on both properties.
Inheritance – if you have been left the money in a will, then the executors should have provided you with documentation showing how much you have received. You will again need to show your bank statement of the money entering your account.
Gift – gifted deposits need a legal agreement written by a solicitor showing that the money is intended as a gift and the person gifting it does not want a portion of the property or to be paid back. It should be signed by you and the person giving the gift. Often your solicitor can provide a template for you to use.
Proof of deposit is one of the first steps towards getting your mortgage, and it shouldn't be complicated. For most people, their deposit will be a mixture of savings, gifts and potentially other elements. Often bank statements will be good enough, but remember that it's always worth having that deposit money in your account ready for when you make an offer.