How do gifted deposits for a mortgage work?
If you’ve not bought a place previously, saving for the deposit on your first home can be a challenge. In fact, one of Britain’s biggest lenders, the Halifax, said that last year the sum needed was on average a hefty £62,500. But it can be made much easier with a gifted deposit.
What is a gifted deposit?
Essentially, a gifted deposit does exactly what it says on the tin. It’s when all or some of the deposit for your home loan is given to you, usually by someone in your family. You can either add this to your own savings or, if you prefer, use it alone to cover all or some of your deposit to get on the property ladder. There’s no limit to how big the gift can be.
Clearly, if at any point you have to repay any of this money, it becomes a loan rather than a gift. So a clear paper trail needs to be in place, and lenders and lawyers will expect to see that your gift has come from a legitimate source, due to anti-money laundering rules.
Should there be any doubt over the evidence that the funds were a gift, there can be delays in completion of the property transaction, and your mortgage application could even be rejected completely.
What are the advantages to gifted deposits?
There are a number of these, with the most obvious one being it’s money you don’t need to repay. Equally, it doesn’t give anyone else legal rights to the property you’re purchasing. But there are others, including:
- With a bigger deposit, of say 25% rather than 10%, you can enjoy cheaper monthly repayments
- You can access more attractive deals and mortgage rates with a larger down payment
- You can become a homeowner in situations where this may not otherwise have been possible
- Using a gifted deposit is straightforward
- Once the gift has been made, there’s no legal or financial tie between the two parties, and the donor cannot expect their money back
Who can gift me a deposit for my mortgage?
Most lenders will prefer that gifted deposits come from family members and not friends. So while parents and grandparents will always be welcome to provide these funds, if your gifted deposit comes from a friend or more distant relation, that could be trickier.
A partner can be allowed, but most lenders won’t accept gifts from the vendor, i.e. the person selling the property.
What is the process for applying to use my gifted deposit?
You’ll need to prove the deposit meets your lender’s requirements before you can be assessed for a mortgage yourself. And you’ll certainly have to tell your solicitor and lender about the gift.
So proof that the sum is a gift, not to be repaid, will be required. A signed letter or document stating this clearly is usually enough to keep lenders happy. Mortgage advisors often have document templates you can use.
Your letter should add that the donor doesn’t expect rights to the property.
- How much money is being given
- The recipient’s name
- The relationship of the purchaser to the donor
- The address of the place you propose to buy
- State that the gift has a legitimate source (e.g. savings)
- Confirm the donor won’t have expect any rights on the house or flat
- Explain that the donor is in a financial position to make the gift
- Lender’s name – also clarify that the gift won’t impact the lender’s position
You and a witness need to sign and date this document. You’ll probably also be asked for photo ID, proof of address and bank statements.
Options include your donor using equity release to fund their gift, and protecting it with a deed of trust, drawn up by the conveyancing solicitor, to ensure the recipient retains ownership of the money if, for example they split from their partner.
What about having someone act as a guarantor instead?
Someone, for example your parents, can serve as a guarantor for your home loan, providing a guarantee if you fail to make the necessary mortgage repayments. This is clearly riskier for a third party than just handing over a gift, so seek legal advice before proceeding.
Are there any tax implications?
There are some. A gift from parents or grandparents is exempt from inheritance tax if they don’t die within seven years. Equally, you can accept £3,000 tax-free annually to save for a deposit. This would not be considered a gifted deposit, nor would it have inheritance tax implications.
Talk to us
Gifted deposits can bring numerous benefits, and make all the difference between being able to become a home owner and remaining a tenant. However, these arrangements are not to be entered into lightly, and you should always have a frank discussion with your broker before proceeding.
At Mortgage Centre Online, we offer friendly, honest advice about home loans, and have many years’ financial experience.
If you’d like to discuss gifted deposits, or indeed anything else mortgage-related, get in touch today for an informal, no-obligation initial chat.