Guide To Gifted Deposits
The majority of first-time buyers rely on family support to get on the property ladder. Read our guide to gifted deposits.
Saving for a deposit is getting tougher.
First-time buyers had to raise an average deposit of £61,000 to get on the property ladder last year, according to Barclays First-Time Buyer tracker.
It’s no wonder then that more than a third of first-time buyers cited the struggle to save for a deposit as the single biggest obstacle standing between them and home ownership.
To overcome this hurdle, the majority of first-time buyers rely on family support to get on the property ladder
For those lucky enough to have family who can help, a gifted deposit could be the answer.
How a gifted deposit works
A gifted deposit is money gifted to home buyers to go towards their house deposit.
There’s no expectation that the cash will be paid back nor do the donors have any claim on the property being purchased. The most common donors of gifted deposits are parents but mortgage lenders will allow gifts from other parties. We’ll look at those later.
Gifted deposits can be made from the donor’s savings or, if they have enough equity built up in their own home, they can remortgage their own property to release the money.
There’s lots of ways to do this, for example Nationwide’s Family Deposit mortgage allows an existing borrower to remortgage and gift a deposit to a Nationwide first-time buyer.
Or a specialist home loan called a Retirement Interest Only mortgage can help parents unlock their property wealth.
The sale of investments could also be the source of the deposit.
A gifted deposit can make up a percentage of your overall down payment on the house, 50% for example. Or it can be your entire deposit. Either of these scenarios are fine, depending on the lender.
If you’ve had credit difficulties in the past and are using a sympathetic but specialist mortgage lender, its rules may insist at least 5% of the deposit comes from your own funds. That’s because you may be likely to care about keeping up with the repayments if you’ve invested some of your own cash in the property.
When you instruct a solicitor you must declare that part or all of your deposit is gifted. You must also tell your lender. Both parties have to run anti-money laundering checks on the person gifting the deposit.
Part of the anti-money laundering check is to ask for the gifted deposit proof of funds. Lenders and solicitors need to be able to trace the source of the money, for example, from a savings account statement where they can see the cash building up.
What is a gifted deposit letter?
If some or all of your deposit is gifted, your mortgage lender will ask for a gifted deposit letter. The letter comes from the person making the gift and contains a list of standard details and declarations.
Your mortgage broker can download a template from your lender’s website for your donor to use.
Typically, the gifted deposit letter must contain:
- The name of the person gifting
- The name of the recipient of the gift
- The relationship between you both
- The value of the gift
- A statement confirming there is no expectation of repayment
- Confirmation that there is no requirement for the donor to receive any stake in the property
- Confirmation that the person gifting the deposit is financially solvent. This is to make sure the money will be available when it’s time to complete the transaction.
The person gifting the deposit and a witness must sign and date the letter. Your solicitor can check it through before it’s submitted to your lender along with your application.
The purpose of the letter is to prevent the person who is making the gift from changing their mind in the future and insisting it was a loan. This could put the borrower under financial pressure if they have to pay it back.
Who can gift a deposit for a mortgage?
I’m sure you’ve heard the phrase, ‘the bank of mum and dad’.
According to insurers Legal & General they are the ninth biggest lender in the country.
Mortgage lenders prefer the gift to come from parents or grandparents because it is more likely to be a legitimate no-strings-attached gift and a low money laundering risk. But other family members and parties can gift a deposit.
Family or friends – aunts, uncles, cousins and friends are less widely accepted by mortgage lenders but some will consider them.
Builder deposit – offered on new-builds as an incentive for buyers, the builder will chip in a fraction of the deposit. To be acceptable to the lender, the full asking price, before the builder’s contribution, must represent the true value of the property.
Vendor deposit – this comes in the form of a discount off the purchase price. It isn’t a common situation and one that is scrutinised by the lender, even if the seller is a family member who has agreed to sell you the property at a discount.
Pros and cons of a gifted deposit
Let’s start with the positives:
By gifting a deposit to someone who has already saved a small deposit, you’ll be lowering the amount they need to borrow from the bank. That means lower monthly mortgage payments for them.
You’ll also be helping them to unlock cheaper mortgage rates. The bigger the deposit in relation to the property value, the lower the rate you’ll be offered.
If they don’t have any deposit, you may be helping your loved ones get on the property ladder years earlier than if they saved themselves.
On the flip side, if your donor changes their mind in the future, or falls on hard times, it could cause a fall out even though they signed a letter saying it was a gift.
What are the tax implications?
A mortgage deposit gift from parents or anyone else for the matter can be gifted tax free.
Everyone is allowed to gift up to £3,000 a year tax free.
Parents get a £3,000 annual allowance each. They can also carry forward any unused allowance from the previous year so if they combined two years’ allowance they could gift £12,000 to their child tax free.
Gifting more than that would be tax free at the time of the donation, known as a Potentially Exempt Transfer, but it could become subject to inheritance tax in the future.
For it to remain tax free the person gifting must live for seven years after making the donation. If they don’t it could be taxed if the value of their estate, including any non-exempt gifts, is worth more than £325,000. Inheritance tax is charged at a rate of 40% on the value of the estate above £325,000.
Depending on which lender you’re using there may be limitations on who can gift to you and whether it can be the whole deposit or a portion.
Halifax, for example, will not allow builder deposits, gifts from an aunt or uncle through marriage or family friends. Santander will not allow the gift donor to live in the property. Other lenders stipulate the person gifting must live in the UK.
If you’ve had credit issues in the past, a specialist lender may not allow you to use a 100% gifted deposit.
Our mortgage experts will be happy to match you and your deposit donor with the right lender to suit your unique circumstances.