Mortgage down payments are one of the biggest hurdles for first-time buyers getting on the property ladder.
Typically, there is a 10% down payment for your mortgage, and the average UK price is at £255,535 now. This means that you’ll need to have around £25,500 to make the deposit.
Most of the time, people ready to purchase a home won’t have this sum in their pockets.
So if you’re pinching and scraping together a deposit, a gift deposit can be a breath of fresh air.
Parents, grandparents, or siblings will often step up and help make the down payments with gift funds.
They will gift a part, or all, of the deposit sum to help them achieve eligibility for the mortgage.
Read on to know everything you need to know about deposit gifts!
What Is A Gifted Deposit?
A gifted deposit is money given to a homebuyer as a contribution towards the deposit or equal to the whole deposit.
Gift deposits are growing increasingly popular as a way of helping first-time buyers get a step on the property ladder.
They are usually given by parents, and sometimes by grandparents or siblings.
A gifted deposit is a gift; it’s not a loan and must be given with no strings attached.
The money must be given freely, and the giver should have no stake in your property.
Who Can Gift A Deposit?
Almost anyone can give a deposit, from family members to partners to even friends.
However, most mortgage lenders prefer gifted deposits from an immediate relative, for example, a parent, grandparent or sibling. A partner can also make a gift deposit.
More distant relatives who are not related to you by blood, such as aunts and uncles, or friends, may not be approved by many lenders.
On the other hand, some lenders only allow parents to gift the money.
Although it’s not a common scenario, you should also keep in mind that most lenders will not accept a gifted deposit from a person who is also the one selling the house.
So, for instance, if you’re purchasing a property from your parents and they’re also the ones helping you fund it, it could be harder to get a mortgage (since that’s just a price reduction on the property).
So if you’ve received a gifted deposit offer from a loved one and are wondering what to do next, it’s a good idea to check with an advisor first to see if a lender will accept it.
What Are The Rules On Gifted Deposit To Buy A House?
Rules on gifted deposits vary from lender to lender. They will all have their own qualifications and criteria around gifted deposits.
Here are the basic rules that most will agree on:
- Confirmation that the money is really a gift and not a loan.
- Confirmation that the gifter has no financial stake or legal right to the property.
- Confirmation That The Money Is Really A Gift And Not A Loan.
Mortgage lenders see gift and loan deposits as two completely different things.
So before approving a gifted deposit, your lender will want the gifter to confirm in written form that the sum is indeed a gift with no expectation of repayment.
If you have to pay the sum back, it will be considered a loan, and your lender will either reduce to accept it or add it to your monthly outgoings to determine whether you can afford the mortgage repayments.
How Do You Prove That The Money Is A Gift?
To prove that the money is a gift, you will need a Gifted Deposit Letter.
While larger banks and lenders will give you a form to fill in, smaller lenders might require a lawyer’s letter.
The Gifted Deposit Letter needs to include the following:
- Gifter’s name.
- Your name.
- The total amount given.
- The source of the money.
- The relationship between the gifter and the receiver.
- Confirmation that it’s a gift with no obligation for repayment.
- Confirmation that the gifter has no financial or commercial stake in the property.
- Proof that the gifter is financially solvent.
The Gifted Deposit Letter needs to be signed by you, the gifter, as well as a witness.
Does The Gifter Need To Provide Anything Else?
Yes, the person giving the money will need to provide:
- Proof of funds: The person giving the money will need to prove that they actually have the money to give you and the source of the funds. If the gifted sum comes from an expected source, such as a property sale, it will be easier to prove. If the money was saved over time, bank statements and payslips would be needed to pass the anti-money laundering checks.
- Proof of ID: The person giving the money must show a photo ID, such as their passport or citizenship. They will also need to provide two proofs of address.
Confirmation that the gifter has no financial stake or legal right to the property.
If this isn’t included in the Gifted Deposit Letter, your lender may require a separate signed letter.
This letter will need to state that the person making your deposit expects no legal interest or equity in your property.
How Big A Sum Can Gifted Deposits Be?
There is no limit on how big a gifted deposit can be, but some lenders only accept a gifted deposit up to a percentage of the property’s value.
It’s also important to note that a large gift could be subject to inheritance tax.
What About Gifted Deposits And Inheritance Tax?
Anyone can gift up to £3,000 a year, exempt from inheritance tax – the tax on the estate of someone who’s died.
Any unused allowance from the previous year can be carried over.
So, for example, if your parents have not given away any money in the last year, they could give you £6,000 this year.
And they could gift you £12,000 if they haven’t gifted anyone in the previous two years.
However, if the sum they give exceeds this, the money would be liable for inheritance tax.
This is because if the gifter dies within seven years of handing it over, it would still be viewed as part of their estate for inheritance tax purposes.
So if the person’s real estate, including the gift, is more than £325,000, up to 40 per cent tax would be due on the excess. The tax on the gift goes down as the seven years elapse.
Alternatives To A Gifted Deposit Mortgage
There are other options if your loved ones want to help you purchase a house but can’t gift you a deposit.
For example, they can be the guarantor on your mortgage, where they would be liable for the payments if you fail to make a payment.
You can also take out a joint mortgage with them, where both of you would be responsible for paying the loan.
If friends and family can’t help, there are also government schemes like shared ownership or Help to Buy.
These will require a much smaller deposit, usually 5%, for first-time buyers.
Have You Been Offered A Gifted Deposit?
If you aren’t confident enough to take the next step, reach out to our team of mortgage brokers to get expert advice on your gifted mortgage deposit.
