Research has shown that the average deposit for a mortgage is now around £26,801, equivalent to 98% of the national average wage. It’s no wonder that people are looking for an alternative means of raising the funds outside of traditional saving.
Fear not though first-time buyers! There are a multitude of steps you can take to get a foot up on the property ladder, one being a gifted deposit mortgage.
What is a gifted deposit?
A gifted deposit is when a family member gives a homebuyer a lump sum of money towards their deposit or gives them the deposit in its entirety.
This transaction is classed as a gift, NOT A LOAN. Therefore, there is no legal requirement for the homebuyer to repay the donor whatsoever.
The larger the deposit you can afford, whether that be 5% or 20% of the overall cost, the more mortgage deals that will be available to you. Therefore, a gifted deposit will help to reduce the amount you have to repay each month.
Who can gift a deposit for a mortgage?
Most lenders will have stipulations on who can and cannot gift a deposit. If you are considering buying a house with your parent’s money, this is the most accepted source of funds. Other immediate family members including grandparents and siblings are usually allowed.
More distant family members such as aunties and uncles are much less likely to be permitted. A mortgage deposit gift from friends meanwhile is extremely unlikely to be accepted.
If you’re a parent looking to get your children on the property ladder, a gifted deposit is often the easiest way of doing so!
As for the purchasers themselves, if you are arranging to receive a house deposit gift from your parents, always make sure to check with your mortgage advisor first. They will confirm that the benefactor is allowed to gift you the money prior to them doing so!
Gifted deposits – A step by step guide
1) Confirm the deposit is a gift with a gifted deposit letter
In order to do this, you will need to provide your solicitor with a gifted deposit letter confirming that the deposit is in fact a gift and stating that the donor shall claim no right over the property. This is extremely important!
Your solicitor will need to prove that the donor is providing the money with absolutely no expectations of getting that money back. Mortgage lenders are very specific about this. This is because they want to eliminate the potential risk of a donor claiming the gift was a loan at a later date.
What to include in your gifted deposit letter
- That you are helping the buyer to purchase a home (include the address)
- That you understand the gift is an unconditional act of kindness and you are by no means motivated by monetary gain
- How much you are gifting the homebuyer
- That you understand the gift is non repayable and you expect to have no right over the property
- A confirmation that your finances are in good order and you have no reason to believe you will become bankrupt in the future.
- Name, Date, Signature, Signature of Witness
2) Get ID from the person gifting
You will need to provide your solicitor with proof of identification from your benefactor. This to meet their AML guidelines (Anti Money Laundering). These vary depending on the solicitor, so be sure to get in touch and ask what they will require.
In most scenarios your solicitor will ask you for:
Photo ID (minimum of 1 is required):
- Driving License
Proof of Address (minimum of 2 is required):
- Driving License
- Utility bill i.e. council tax, electric, gas or water.
- HRMC Letter
- Bank Statement (the best one to provide)
Again, the documents your solicitor will require vary from firm to firm. Therefore, you should get in touch with your lawyer at the earliest opportunity so that you know exactly what is required of you.
3. Get proof of funds
Your solicitor is going to need to check where the funds have come from. For most this is extremely simple, it is likely the funds have come from the sale of a large asset such as a house, the sale of shares or a pension draw out. All of these are painless to prove. Your benefactor can simply provide evidence where the funds were sourced from.
If, however, the funds have been gradually saved over time, your solicitor may require evidence of long term savings. This is needed to prove the source of the funds and meet the Anti Money Laundering guidelines. In this case, provide as much evidence as you can find. It is always better to have more documentation than you need.
Protection from your partner when receiving help with your deposit
This is something people generally don’t like to think about. However, it is extremely relevant if you’re buying with a partner. A ‘Deed of Trust’ can be drawn up by your solicitor for a reasonable price.
This document will state how the equity in the house will be divided should you and your partner separate or one of you die.
It is worth considering what will happen to your money if the relationship doesn’t work out, if either party wants to sell in the future or one of you dies.
What are the risks associated with a gifted deposit?
Inheritance tax is an issue to consider when gifting or receiving a deposit. If the person gifting the deposit dies within 7 years of donating the funds, that donation may be subject to inheritance tax. This is entirely dependent on the size of their estate. If it’s worth upwards of £325,000 (including the gift) you may have to pay inheritance tax.
It is advisable that, before making the gift, the donor should seek independent legal advice.
Alternatives to a gifted deposit
There are several different options available if you need financial help to get on the property ladder.
A “springboard” mortgage allows a family member to put between 5% and 10% deposit into a savings account with your chosen lender. These funds will remain locked until you have paid off an agreed percentage of your mortgage.
Another option is nominating a parent as your mortgage guarantor who can ‘guarantee’ your mortgage should you fail to pay it. A mortgage lender will consider them for a guarantor position if they have a large amount of equity in their property. They’ll also need to prove that they are capable of paying both their outgoings as well as your mortgage payments.
Additionally, because of the added security of having a mortgage guarantor, your lender may be more inclined to allow you a larger sum of money.
Those still saving hard for their deposit should consider setting up a Lifetime ISA. The government launched this scheme to help people saving for their first house or retirement. You can find out more about that by reading the terms and conditions on the government’s website.
It is now widely accepted that in order to afford a house as a first-time buyer, schemes such as a gifted deposits are often necessary.
With the ever-increasing living and rental costs it makes sense for a parent or other family member to help with the initial payments.
Using a gifted deposit will not make getting a mortgage more difficult, as long as you follow the steps outlined in the article.
If you’re serious about moving forward with a gifted deposit, contact your financial advisor for advice and guidance throughout the process.
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