Purchasing a home is a significant financial milestone for many individuals, and saving for a deposit can be a daunting task. However, with the increasing popularity of mortgages with gifted deposits, aspiring homeowners have found a viable solution to overcome this hurdle. In this article, we explore the ins and outs of obtaining a mortgage with a gifted deposit, discussing the process, benefits, and considerations for both the homebuyer and the generous donor. Whether you’re a first-time buyer or a family member looking to support a loved one in their homeownership journey, this comprehensive guide will help you navigate the world of mortgages with gifted deposits and make informed decisions along the way.
What is a mortgage with a gifted deposit?
A mortgage with a gifted deposit is a home loan where a third party, typically a family member or close friend, provides all or a portion of the required deposit as a gift for the mortgage. This type of deposit helps homebuyers who may not have sufficient savings to cover the deposit amount, which is typically a percentage of the property’s value.
In the UK, most mortgage lenders accept gifted deposits as part of the home buying process. However, there are specific requirements and conditions that need to be met:
The gift must be a genuine, non-refundable gift: The donor (person providing the gift) must confirm in writing that the funds are a genuine gift and that they have no intention of asking for repayment. They should also declare that they won’t have any claim on the property or any financial interest in it.
Source of funds: Mortgage lenders may require proof of the source of the gifted funds to ensure they have been legally obtained and to comply with anti-money laundering regulations.
Relationship between the donor and the borrower: Lenders typically prefer gifts from close relatives like parents, grandparents, or siblings. Gifts from friends or distant relatives may be accepted, but lenders might require additional documentation or impose stricter conditions.
Affordability assessment: The borrower will still need to pass the lender’s affordability checks, demonstrating that they can afford the mortgage repayments without relying on the gifted deposit.
Documentation: Proper documentation should be provided to the lender, including a gifted deposit letter outlining the relationship between the donor and borrower, the gift amount, and a confirmation that the gift is non-refundable and doesn’t need to be repaid.While a mortgage with a gifted deposit can be beneficial for first-time buyers or those struggling to save for a deposit, it is essential to understand the conditions and requirements set by mortgage lenders before proceeding.
How does a gifted deposit work, and how do I get a mortgage with a gifted deposit?
To get a mortgage with a gifted deposit, follow these steps:
Choose a mortgage lender: Research different mortgage lenders to find one that accepts gifted deposits and offers suitable mortgage products for your needs. You may want to consult a mortgage broker to help you find the best deal and navigate the application process.
Confirm the gift: Speak with the person providing the gifted deposit to ensure they understand the implications, requirements, and responsibilities involved in giving and receiving a gifted deposit for a mortgage.
Prepare a gifted deposit letter: Request a gifted deposit letter from the person providing the funds. The letter should include their full name, address, contact details, your full name, your relationship to them, the amount of the gift, a statement confirming that the gift is non-refundable and doesn’t need to be repaid, a declaration that they will not have any claim on the property or financial interest in it, the date, and their signature.
Gather documentation: Collect necessary documents, such as proof of the source of the gifted funds (e.g., bank statements), identification documents for the donor, and any other documentation required by the mortgage lender.
Assess affordability: Ensure you can meet the mortgage lender’s affordability requirements by providing evidence of your income, employment, and expenses, such as payslips, bank statements, and tax returns. This will help demonstrate that you can afford the mortgage repayments without relying on the gifted deposit.Complete the mortgage application: Fill out the mortgage application form, providing details about the property, the amount you wish to borrow, and your personal and financial information.
Submit the application: Submit your mortgage application, along with the gifted deposit letter and all required documentation, to the mortgage lender. Be transparent about the gifted deposit and provide any additional information the lender may request.
Wait for approval: The mortgage lender will review your application, assess your credit history, and determine if you meet their lending criteria. If approved, they will issue a mortgage offer outlining the terms of the loan.
Complete the purchase: Work with a solicitor to finalise the property purchase, complete the conveyancing process, and arrange for the transfer of the gifted deposit to your solicitor, who will then transfer the funds to the seller’s solicitor upon completion.
Remember that requirements may vary among lenders, so always check with your chosen lender to understand their specific criteria for accepting gifted deposits.
How can I prove that my deposit is a gift?
To prove that your deposit is a genuine, non-refundable gift, you’ll need to provide your mortgage lender with a gifted deposit letter from the person giving you the funds. The letter should confirm that the funds are a gift, that they don’t expect repayment, and that they won’t have any claim on the property or financial interest in it.
Do I need a gifted deposit letter and what should my gifted deposit letter say?
A gifted deposit letter should include the following information:
- The donor’s full name, address, and contact details.
- The borrower’s full name and their relationship to the donor.
- The amount of the gifted deposit.
- A statement confirming that the gift is non-refundable and does not need to be repaid.
- Mention the name of your lender and state that the gift won’t have an impact on their position.
- The gift has originated from a legitimate source, like a savings account.
- The address of the property you want to buy.
- A declaration that the donor will not have any claim on the property or financial interest in it.
- Donor is financially able to gift you a deposit.
- The date and the donor’s signature
It’s a good idea to check with your mortgage lender for any specific requirements they may have for the gifted deposit letter.
What other documents will I have to provide?
In addition to the gifted deposit letter, mortgage lenders may require the following documents:
Proof of the source of the gifted funds: This could include bank statements or other financial documents showing that the donor has the funds available and that they have been legally obtained. This is to comply with anti-money laundering regulations and ensure the funds are legitimate.
Identification documents for the donor: Lenders may require a copy of the donor’s ID, such as a passport or driver’s licence, to verify their identity.
It’s essential to be transparent with your mortgage lender about the gifted deposit and provide all required documentation. Keep in mind that requirements may vary among lenders, so always check with your chosen lender to understand their specific criteria for accepting gifted deposits.
Are there any benefits to using a gifted deposit?
Yes, there are several benefits to using a gifted deposit when purchasing a property:
Increased affordability: A gifted deposit can help borrowers who may not have sufficient savings to cover the deposit amount required to purchase a property. This can make homeownership more accessible and affordable.
Higher chance of mortgage approval: A larger deposit can increase your chances of mortgage approval because it reduces the lender’s risk. If you’re struggling to save for a deposit, a gifted deposit can help you reach the required amount more quickly.
Access to better mortgage rates: Generally, the larger your deposit, the lower your Loan to Value (LTV) ratio. A lower LTV often means access to more competitive mortgage rates, which can save you money in the long run.
Reduced monthly payments: If you have a larger deposit, you’ll need to borrow less money. This can result in lower monthly mortgage payments, making your ongoing costs more manageable.
Ability to buy sooner: With a gifted deposit, you may be able to buy a property sooner than you could if you had to save the entire deposit yourself. This could be particularly beneficial in a rising property market, where house prices may increase faster than you can save.
Helps first-time buyers: Many first-time buyers struggle to get on the property ladder due to the large deposits required. A gifted deposit can make home ownership a more achievable goal.
Avoiding or minimising mortgage insurance: In some cases, a larger deposit may help borrowers avoid the need for mortgage insurance or reduce the premium amount. Mortgage insurance is typically required for higher LTV ratios, and a gifted deposit may help keep the LTV low enough to avoid this additional cost.
While there are many benefits to using a gifted deposit, it’s also essential to be aware of the potential implications. For example, the person gifting the deposit should be aware that they won’t have a claim to the property (unless otherwise legally arranged) and that they may have to pay taxes on the gift, depending on its size and their jurisdiction’s gift tax rules.
Are gifted deposits that common in the UK?
Certainly, gifted deposits have become increasingly common in the UK, particularly among first-time homebuyers. With rising property prices and the challenges of saving for a deposit, many young people find it difficult to get on the property ladder without financial assistance from their families.
According to various studies and surveys conducted in recent years, a significant proportion of first-time buyers in the UK receive help from their parents or other family members in the form of gifted deposits. The exact percentage varies depending on the survey, but it’s generally estimated that around 25–35% of first-time buyers receive some form of family assistance for their home purchase.This trend has led to the coining of the term “Bank of Mum and Dad” in the UK, highlighting the role parents play in helping their children buy a property.
Some lenders have even introduced mortgage products specifically designed for situations where parents or family members provide financial assistance to first-time buyers.While gifted deposits can be a great help for first-time buyers, it’s important for both the giver and the recipient to understand the potential implications and risks involved, such as tax implications, mortgage eligibility, and protecting the gifted deposit in case of disputes or relationship breakdowns.
Who can gift me a deposit for a mortgage?
Mortgage lenders in the UK typically prefer gifted deposits to come from close family members, as they are more likely to be genuine gifts without any expectation of repayment. Common sources of gifted deposits include:
- Parents or step-parents
- Grand parents
- Siblings or step-siblings
Some lenders may also accept gifted deposits from other relatives or close friends, but this varies depending on the lender’s specific criteria and may require additional documentation or stricter conditions.
What if I need to repay my gifted deposit back?
If you need to repay your gifted deposit, it’s essential to understand that this arrangement would no longer be considered a genuine gift by most mortgage lenders. Instead, it would be classified as a loan, which could have implications for your mortgage application.
Impact on mortgage application: When a gifted deposit needs to be repaid, mortgage lenders may be less likely to approve your application, as the repayment obligation could affect your ability to afford the mortgage repayments. Lenders are generally more comfortable with genuine gifts that don’t impose a financial burden on the borrower.
Update the gifted deposit letter: If you must repay the gifted deposit, you should inform your mortgage lender about the change in circumstances. You’ll need to update the gifted deposit letter to reflect that the funds are now a loan and include details about the repayment terms.
Reassess affordability: The mortgage lender will need to reassess your affordability, taking into account the additional loan repayment. This could impact the amount you’re able to borrow or even result in the rejection of your mortgage application if the lender believes you can’t afford the mortgage and the repayment of the gifted deposit.
Consider alternative options: If repaying the gifted deposit affects your mortgage application, you might need to explore alternative options, such as saving for a larger deposit, applying for a government-backed home buying scheme (e.g., help to build), or considering shared ownership arrangements.
It’s essential to be transparent with your mortgage lender about any changes in your financial situation or the status of your gifted deposit. If you need to repay the gifted deposit, discuss the implications with your lender and explore the available options to determine the best course of action for your circumstances.
Can I use a guarantor instead of a gifted deposit?
Yes, using a guarantor instead of a gifted deposit is an alternative option for those who may not have access to a gifted deposit or have difficulty meeting the deposit requirements for a mortgage. A guarantor mortgage involves a third party, typically a family member or close friend, who agrees to take on the financial responsibility of the mortgage should the borrower fail to make the repayments.
Here’s what you need to know about guarantor mortgages:
Guarantor’s role: The guarantor agrees to cover the mortgage repayments if the borrower is unable to do so. This provides an additional layer of security for the lender, making them more likely to approve the mortgage application, even with a lower deposit or weaker credit history.
Guarantor’s responsibilities: The guarantor is legally obligated to repay the mortgage if the borrower defaults on their payments. This could have significant financial consequences for the guarantor, so it’s crucial for both parties to understand the responsibilities involved.
Eligibility: Guarantor mortgages are typically offered to first-time homebuyers or those with limited credit history. The guarantor must have a good credit score, a stable income, and often be a homeowner themselves to be eligible.
Types of guarantor mortgages: There are different types of guarantor mortgages, such as those where the guarantor offers their property as collateral or where they commit to depositing a sum of money into a savings account as security for the mortgage. The specific arrangements vary depending on the lender and the mortgage product.
Potential impact on the guarantor: Acting as a guarantor can affect the guarantor’s credit score and borrowing capacity. If the borrower defaults and the guarantor is required to make repayments, it may negatively impact their credit score and ability to secure future loans.
While a guarantor mortgage can be a viable alternative to a gifted deposit, it’s essential for both the borrower and the guarantor to understand the risks and responsibilities involved. It’s also important to research various mortgage lenders and products to find a suitable guarantor mortgage that fits your needs.
Are there any alternatives to using a gifted deposit?
Yes, there are several alternatives to using a gifted deposit when purchasing a property. Some of these options include:
Saving for a larger deposit: The traditional route is to save up for a deposit over time, gradually accumulating the necessary funds through budgeting and disciplined saving. While this may take longer, it helps you build up your financial stability and reduces your reliance on external assistance.
Government-backed schemes: The UK government offers various home-buying schemes to help first-time buyers and those with limited financial resources purchase a property. Some popular schemes include Help to Buy, Shared Ownership, and Right to Buy. These schemes typically require a smaller deposit and can provide additional financial support to help you get on the property ladder.
Guarantor mortgages: As previously mentioned, guarantor mortgages involve a third party (usually a family member or close friend) who agrees to take on the financial responsibility for the mortgage if the borrower is unable to make the repayments. This can help borrowers who may struggle to save for a deposit or have a limited credit history.
100% mortgages: While rare, some lenders may offer 100% mortgages, which don’t require a deposit. However, these types of mortgages often come with higher interest rates and may require additional security, such as a guarantor or a charge on a family member’s property.
Family offset mortgages: In this type of mortgage, a family member deposits a sum of money in a linked savings account, which is used to offset the mortgage balance. This can reduce the borrower’s monthly repayments and the amount of interest paid over the mortgage term. The family member may also receive their savings back, often with interest, after a fixed period.
Joint mortgages: Another option is to apply for a mortgage jointly with another person, such as a partner, friend, or family member. This allows you to combine your income and savings, making it easier to meet the deposit requirements and afford the mortgage repayments.
Each of these alternatives has its pros and cons, and the best option for you will depend on your financial situation, preferences, and long-term goals. It’s essential to research your options thoroughly and consult with a financial adviser or mortgage broker to help you make an informed decision.
How does a gifted deposit affect a mortgage?
A gifted deposit can significantly impact a mortgage application in several ways:
Increases affordability: A gifted deposit can increase the affordability of a property for the borrower, especially for first-time homebuyers who may not have had enough time to save for a large deposit. It can bridge the gap between what a buyer has saved and the deposit required by the lender.
Better mortgage rates: The larger the deposit, the lower the loan-to-value (LTV) ratio. A lower LTV generally gives access to more competitive mortgage interest rates because it reduces the lender’s risk. With a gifted deposit, borrowers may be able to lower their LTV and secure a better mortgage deal.
Increases approval chances: A larger deposit often makes the mortgage application more attractive to lenders, thereby increasing the chances of approval. Lenders view borrowers with a larger deposit as less risky.
Reduces monthly repayments: With a larger deposit and potentially a better mortgage rate, the total amount borrowed will be lower, reducing monthly mortgage repayments.
Mortgage insurance: In some cases, a larger deposit can help borrowers avoid or reduce the cost of mortgage insurance, which is typically required for mortgages with a high LTV ratio. However, lenders have specific requirements for gifted deposits. They need to be sure that the gifted deposit is indeed a gift and not a loan. This is to ensure that the borrower doesn’t have additional debt that could affect their ability to repay the mortgage. It’s important that the gift doesn’t come with any expectation of repayment or claims on the property. To confirm this, lenders typically require a gifted deposit letter from the person giving the gift.
In summary, a gifted deposit can be beneficial in obtaining a mortgage, but it’s crucial to be transparent with the lender about where the deposit is coming from and to provide all the necessary documentation.
Do you have to pay tax on gifted deposits?
In most cases, the recipient (the person receiving the gift) is not required to pay tax on gifted deposits. However, there may be tax implications for the person giving the gift, depending on the size of the gift and the donor’s financial situation.
Inheritance tax (IHT): If the person giving the gift (the donor) passes away within seven years of giving the gift, the gifted deposit may be subject to inheritance tax (IHT) if the total value of the donor’s estate and gifts exceeds the IHT threshold (£325,000 in 2021–2026). If the gift becomes subject to IHT, the recipient or the estate may need to pay the tax.
Annual exemption: Each person has an annual gift allowance of £3,000, which means they can give away assets or cash up to this value each tax year without it being added to the value of their estate for IHT purposes. If the gifted deposit is within this limit, it will not be subject to IHT, even if the donor passes away within seven years of giving the gift.
Taper relief: If the donor passes away between three and seven years after giving the gift, taper relief may apply, reducing the amount of IHT payable on a sliding scale.
It’s important to note that tax laws and regulations can change, and the tax implications of a gifted deposit may vary based on individual circumstances. To ensure you understand the potential tax consequences, it’s advisable to consult with a tax adviser or financial professional for specific guidance.
What is proof of deposit?
Proof of deposit refers to the documentation required by mortgage lenders to verify the source and legitimacy of the funds being used as a deposit for a mortgage application. The purpose of providing proof of deposit is to confirm that the borrower has the necessary funds to cover the deposit, and to ensure that the funds have been obtained legally and in compliance with anti-money laundering regulations.
Proof of deposit can take several forms, depending on the source of the funds:
Savings: If the deposit comes from your personal savings, you will typically need to provide bank statements from the account(s) where the funds are held. These statements should cover a specific period, usually between three to six months, and show a clear history of the funds accumulating over time.
Gifted deposit: If the deposit is a gift from a family member or friend, you will need a gifted deposit letter from the donor, which confirms that the funds are a genuine gift and not a loan. Additionally, the lender may require the donor to provide bank statements or other financial documents to confirm the source of the funds.
Sale of an asset: If the deposit comes from the sale of an asset, such as a property or a vehicle, you may need to provide documentation related to the sale, including a sales contract, a completion statement, or other relevant documents that show the proceeds of the sale.
Inheritance or windfall: If the deposit is from an inheritance or a windfall, you may need to provide legal documents, such as a will or grant of probate, or a letter from a solicitor or an executor confirming the amount you received.
Investments: If the deposit is from investments, such as stocks, bonds, or dividends, you may need to provide investment statements, sale confirmations, or other documents that show the value of the investments and how they were liquidated.
Loan: If the deposit is from a loan (not recommended), you will need to provide the loan agreement and evidence of the loan disbursement.
Requirements for proof of deposit may vary between lenders, so it’s essential to check with your chosen mortgage lender to understand their specific criteria and documentation requirements.
How can parents protect a house deposit gift?
Parents who are gifting a house deposit to their child can protect the gifted deposit with a declaration of trust. This can help protect the gifted deposit in the event of a dispute or relationship breakdown.
What is a declaration of trust?
A Declaration of Trust, also known as a Deed of Trust or Trust Deed, is a legally binding document that outlines the financial arrangements and ownership structure between joint owners of a property or individuals who have a financial interest in a property. It is commonly used when two or more people purchase a property together, particularly when their contributions to the deposit, mortgage payments, or property expenses are unequal.
A declaration of trust serves several purposes:
Clarifies ownership shares: The document sets out the percentage of ownership each party holds in the property, which may not necessarily be equal. This is particularly important when individuals have contributed different amounts to the deposit or ongoing costs.
Protects individual interests: By specifying the ownership shares and financial contributions of each party, a Declaration of Trust helps protect each person’s financial interest in the property, ensuring they receive their fair share when the property is sold or refinanced.
Outlines responsibilities: The Declaration of Trust can also outline the parties’ responsibilities regarding mortgage payments, maintenance, repairs, and other property-related expenses, helping to avoid disputes and misunderstandings in the future.
Governs future transactions: The document may also include provisions on how the property should be managed in the event of a sale, refinancing, or if one party wishes to buy out the other’s share, ensuring a clear process for these transactions.
A declaration of trust should be drafted by a solicitor to ensure it complies with legal requirements and accurately reflects the parties’ intentions. The document should be signed by all parties involved and witnessed to make it legally binding.
If you’re considering purchasing a property with another person or receiving financial support from someone who isn’t a joint owner, it’s important to consider creating a Declaration of Trust to protect everyone’s interests.
Do lenders have to allow gifted deposits?
Lenders are not legally required to accept gifted deposits, but many do because it can help potential homebuyers secure a mortgage. A gifted deposit is a sum of money given to a homebuyer, typically by a family member, to help them with their down payment for a property.
Each lender has its own policies and guidelines regarding gifted deposits. They may have specific requirements for the source of the gift, the relationship between the gift giver and the recipient, and documentation to prove that the funds are indeed a gift and not a loan.
If you plan to use a gifted deposit for a mortgage, it’s essential to check the requirements of the specific lender you’re considering working with. Some lenders may have more stringent guidelines, while others may be more flexible.
It’s also a good idea to seek professional advice from a mortgage broker or financial advisor to ensure you understand the implications of using a gifted deposit and any potential tax consequences for both the giver and the recipient.
If I get a gifted deposit, can I add my own savings to it?
Yes, you can certainly add your own savings to a gifted deposit when purchasing a property. In fact, combining a gifted deposit with your own savings can strengthen your mortgage application and increase your chances of securing a mortgage with better terms.
In conclusion, securing a mortgage with a gifted deposit can be a valuable strategy for prospective homebuyers who need assistance in gathering the funds required for a down payment. This approach not only enables them to achieve their homeownership dreams but also offers a unique opportunity for family members and loved ones to provide financial support. However, it is essential for all parties involved to understand the process, benefits, and potential risks associated with a mortgage with a gifted deposit. By following the necessary steps, providing the required documentation, and seeking professional advice when needed, homebuyers can successfully navigate this alternative route to homeownership, making the dream of owning a home a reality.