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Coming up with a deposit can be the most daunting challenge you face when buying your first home.
One option that can prove to be a great solution to this problem is using a gifted deposit.
In this article, our expert team of mortgage advisers at PIL Southampton cover all the ins and outs of the gifted deposit, to help you decide if it could be right for you.
As the description implies, a gifted deposit is an amount of money that is given to a first-time buyer to provide either part or all the deposit, enabling them to buy their first home.
However, there are strict rules and conditions that need to be adhered to – it’s not as simple as a parent transferring funds across to their child’s account, for example.
The key word is ‘gift’. It is not a loan and there is no expectation for the money to be paid back. Parents are often the givers of a gifted deposit, which can be the most straightforward way to give their children financial assistance.
Crucially, the person providing the gifted deposit has no legal rights to any portion of the property that is being purchased.
A 5% deposit is the minimum deposit most lenders will ask for. It is worth noting however that larger deposits open a wider variety of mortgage products with lower interest rates and as you will be borrowing less money you will have a lower monthly mortgage repayment.
So, even if you have saved a 5% deposit yourself, it could be worth increasing that percentage with a gifted deposit.
Although, technically, anyone can gift a deposit for a mortgage, most lenders tend to prefer a parent, grandparent, sibling, or partner to be the person gifting the money. They may decline friends, or more distant relatives like aunts and uncles.
It is also highly unlikely for a lender to accept a gifted deposit from the person selling the house – which could be a problem if you are buying a house from a close relative.
Some lenders do not accept gifted deposits at all, so you need to let your lender know, during the application process, if this is the route you are planning.
Although it is the same process as applying for a standard mortgage, incorporating a gifted deposit will come with different conditions that you need to be aware of. It is a good idea to ask an experienced mortgage adviser like our team at PIL Southampton, as we have a good understanding of these products and will be able to recommend the best lenders for your circumstances.
You will also need to let your solicitor know that your house purchase includes a gifted deposit.
Yes, you do. Lenders need to be assured that the money is a gift, not a loan, to ensure you are not taking on undisclosed debt that could affect your affordability status.
To comply with anti-money laundering checks, your lender may ask the person giving the money to provide bank statements detailing the origin of the funds.
Larger banks and building societies usually have their own gifted deposit declaration form that they will ask you to complete. Smaller lenders may ask for a signed and certified gifted deposit letter.
Either way, you will need to include the following information: the name of the person receiving the gift; the source and amount of funds; the relationship between the giver and receiver; confirmation that it’s a gift not a loan, and that the giver will not have any claim on the property. Finally, the giver will have to prove that they are financially solvent.
As well as providing origin of funds evidence – straightforward if the money has come from a property sale, but more complex if the money has been accumulated over a longer period of time, the person giving the money will have to show photo ID, i.e. their passport or driving license, and two proofs of address.
Yes, you can use multiple gifted deposits. Each will be treated separately, with their own set of required information documentation, and individual gifted deposit letters or completed gift declaration forms.
Someone can loan you money for all or part of your deposit, but this will be viewed completely differently by your lender than if it was a gifted deposit. They will add the deposit you are being loaned by your family member or friend in the same way they would any other financial commitment you have, like a car lease agreement. So, it would be taken into account when the lender is running your affordability checks.
There is no upper limit, though you will need to check with your lender that they do not have their own rules limiting the amount of a gifted deposit they will accept.
Gifted deposits are usually tax-free in the UK. All individuals can give away up to £3,000 per year without incurring inheritance tax, and an unused allowance can be carried forward into the following year.
If the amount of gifted deposit is larger than this amount, or if the person providing your gifted deposit passes away within seven years, it will become a Chargeable Transfer and may be subject to inheritance tax – always take professional advice on such matters.
Yes, you can. A gifted deposit does not have to be your whole deposit; we usually recommend that you pull together as big a deposit as you can, to give you lower monthly repayments and better mortgage terms. If your combined savings and gifted deposit gets you over the next threshold, i.e. from a 5% tier to a 10% or 15% tier, you should be able to benefit from a lower interest rate o on a lower mortgage sum.
A common scenario is when your child buys a property with a partner or with friends. In this instance, you can protect the money you have given in case they go their separate ways, by asking your conveyancing solicitor to draw up a declaration of trust, also known as a deed of trust. This will legally note that the gift should be returned to your child on the sale of the house, not shared with their partner or friend.
This deed of trust is a versatile document that could also be used to stipulate payback conditions if you are receiving money from a relative or friend as a loan rather than a gift, and it could also be used by the house buyers if they would like to set out who is going to be responsible for what outgoings, and what would happen to the property if they go their separate ways.
Note that marriage could affect the deed of trust.
Your parents may want to financially contribute to helping you buy your first home but may not have the money to gift you a deposit.
In these circumstances, there are other options available to you.
With a joint mortgage, all parties would be responsible for repaying the loan. An advantage of this kind of mortgage is that both your incomes would be taken into account so you could take out a larger loan. However, one major drawback is that, if your parents already own a property, the new home they buy with you would be classed as a second home and incur a 3% additional stamp duty surcharge.
Also, if your parents are still on the mortgage when your house is sold, they could be liable for capital gains tax. Some lenders will allow you to take on a joint mortgage without adding your parents’ names to the property title deeds, which would avoid these tax issues.
A guarantor mortgage could increase your chances of being approved for a mortgage, however, the risk to the person guaranteeing you could be significant; if you miss payments, they could lose their savings or even their home.
Your relative or friend puts a deposit for your property, typically 10%, into a savings account on your behalf, which acts as your security. This account is linked to your mortgage, like an offset mortgage. The savings account holder must commit to leaving the money in the account for a set period of time, usually five years, and they can earn interest during the time it is deposited.
Gifted deposits have their own set of criteria and rules, which our knowledgeable team at PIL Southampton is experienced with. They will be able to provide advice and recommendations that best suit your personal circumstances.
Our expert mortgage advisers are here to guide you through the mortgage process, every step of the way. You can email us, fill out the contact form on our website or call us on 02380 668407. We look forward to hearing from you.
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