Gifted Deposit Mortgages: How They Work
A gifted deposit is when parents or a close relative give you money towards a mortgage deposit with no strings attached. Lenders usually require a gifted deposit letter from the gifter to confirm you don’t need to pay the money back.
If you’re finding it hard to raise the deposit required to take your first step onto the property ladder, you’re definitely not alone.
According to a recent survey by Zoopla, 64% of parents with children who are homeowners said they had helped their offspring financially to buy their first home. What is more, their average contribution towards the deposit was an eye-watering £32,440, but can parents, or others, simply gift money for a mortgage this way?
Read on to find out more about gifted mortgage deposits.
What is a gifted deposit?
A gifted deposit is a sum of money given to someone – typically by a member of their family – to part fund or pay entirely for the deposit they need to buy a home. Importantly, a gifted deposit is money that should have no strings attached – this means it isn’t a loan that is expected to be repaid, either partially or in full. Whoever has provided the funds should not have done so with the expectation of owning a stake in the property either.
Who can give a gifted deposit?
When it comes to gifted deposits, lenders want to know where the money you have received has come from. Generally, gifts from immediate family members such as parents, grandparents and siblings will pose few problems. However, some lenders are reluctant to accept a gifted deposit that has come courtesy of distant relatives or from a friend, and could even turn you away. For this reason, it’s always best to check with a mortgage company its particular rules surrounding gifted deposits.
How to get a mortgage with a gifted deposit
Getting a mortgage as a first-time buyer, and raising a deposit, can be a challenge financially, and for many, a gifted deposit from family is the only way to hasten progress towards homeownership. Knowing how much you need to put down on a mortgage deposit, and reaching this goal, will give you the best chance of mortgage success. And if you have started saving already, any boost by way of a gift could also aid your cause in accessing the very best mortgage rates that only become available with larger deposits.
» COMPARE: Find first-time buyer mortgages
Other than widening your choice to include higher deposit mortgages, using a gifted deposit should have no bearing on the type of mortgage you can attain – lenders don’t have specific gifted deposit mortgages. However, you should always be upfront about your intention to use a gifted deposit in the early stages of applying for a mortgage to help smooth the path through the anti-money laundering checks.
To this end, mortgage lenders will ask borrowers with a gifted deposit to provide certain documentation.
How to prove a gifted deposit
To prove that a gifted deposit is a gift, lenders require a ‘gifted deposit letter’, written by whoever has given you the funds, to confirm that there is no obligation to pay the funds back, as you would with a loan. Most lenders and mortgage advisers have a gifted deposit letter template to help, or you can arrange for your gifter to produce their own letter, which they should sign and date in the presence of a witness.
A gifted deposit letter should confirm:
- The name of whoever has received the gift
- The relationship between the gifter and giftee
- How much the gifted deposit is for
- That the funds do not have to be repaid
- That the gifter will have no rights or interest in the property in return
- That the gifter is solvent financially
For money laundering purposes, mortgage lenders will usually require that a gifter provides a form of photo identification, proof of address and copies of their bank statements, too.
Do you get taxed on a gifted deposit?
While a gifted deposit raises no immediate liability for tax, Inheritance Tax (IHT) could become an issue if your gifter dies within seven years of making their donation. However, this might only be the case if your benefactor’s estate is more than £325,000 (including the gifted deposit).
It’s also possible to make use of the annual gift allowance which allows for people to give away up to £3,000 each year without tax reprisals. This sum does not need to be declared as a gifted deposit and should be exempt from IHT, too.
» MORE: Learn more about estate planning
The pros and cons of a gifted deposit
For many first-time buyers, a gifted deposit will be the quickest or, perhaps, the only way to turn their homeownership aspirations into reality. If you have a smaller deposit, and this is supplemented by a gifted deposit, you could benefit from lower mortgage rates, and therefore more affordable monthly payments, too.
On the downside, your gifter’s generosity will cause them some extra work in the way of writing a gifted deposit letter and providing other information as required. And while there are no immediate tax implications for either you as the recipient or the gifter, inheritance tax could become an issue in the future.
Alternatives to a gifted deposit
Where a gifted deposit does not suit, there are several other ways parents, and perhaps grandparents, can help the younger generations of their family to buy a first home.
Lending a deposit
One option is to lend money for a deposit and, if this just happens to be interest-free, it will prove more cost-effective than taking out a personal loan for the same purpose.
Even if interest does not come into the equation, mortgage lenders could still treat such arrangements in the same way as they would a formal loan. This means the repayments you are making may be taken into account when calculating how much you can borrow, and could reduce the size of mortgage you’re offered. Some lenders may even reject your mortgage application altogether.
A further option is to be a mortgage guarantor for their offspring instead. A guarantor effectively guarantees to cover your mortgage if you fall behind with your payments, and is usually required if you have no deposit and want to take out a 100% LTV mortgage. Some lenders refer to these extremely high loan-to-value options as a family assist mortgage. These products will usually require you to either lock away money into a savings account with the lender or accept a charge on your own home.
Entering into a joint mortgage is another alternative, and can help boost a first-time buyer’s purchasing power, too. This is because both the parents’ and child’s earnings will be taken into consideration by a lender when calculating what they can afford. If pursuing this option it's important to remember that borrowing based on multiple incomes could mean repayments are too high for the individual living at the property. In addition to this parents will need to demonstrate affordability on both properties.
» COMPARE: Find low-deposit mortgages
Should your family be unable to help you out financially, meaning you’ll need to raise a deposit on your own, a Lifetime ISA is a great way to make the most of your savings. Lifetime ISAs are a government-backed tax-free savings scheme designed to incentivize people to save for their first home or retirement through the payment of bonuses on savings.
Image source: Getty Images
Tim draws on 20 years’ experience at Moneyfacts, Virgin Money and Future to pen articles that always put consumers’ interests first. He has particular expertise in mortgages, pensions and savings. Read more