What is a gifted mortgage deposit?
A gifted deposit is a sum of money that is given by a family member forming all or part of a deposit for somebody wanting to buy a property. It is possible for friends to gift money to enable someone to buy a property, but is less favourable for lenders.
This can be really useful for if you haven’t been able to save the minimum 5% you need for most mortgages, or to help you increase your deposit to 10% or 15% to secure a cheaper mortgage deal and lower monthly repayments.
This is a common way for parents to help their children onto the property ladder, but there are some hoops that both you and your generous gift-giver will have to jump through to ensure your mortgage lender is happy with the arrangement and that there are no delays to your mortgage application.
Expert advice on gifted mortgage deposits
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Who can gift a mortgage deposit?
As we mentioned earlier, mortgage lenders prefer that a gift is given by a family member, and some will specify that gifts can only be given by people you’re related to.
Some lenders will only accept gifted deposits from parents, whereas others will be happy with gifts from grandparents or siblings.
If a friend or distant relative is giving you money, it’s vital you check with your mortgage broker or lender to see if this is acceptable.
What does my lender need for a gifted mortgage deposit?
Both your mortgage lender and your solicitor may wish to see a bank statement or something to confirm where the gifted money is coming from, along with some identification of the person giving the gift and proof of address.
This is a standard part of the anti-money laundering checks these companies have to do. Solicitors have strict rules to follow and will want to know whether the gift has come from the sale of a property, investments or savings – along with evidence to back this up.
Your lender will also expect to see a gifted deposit declaration letter. This is a written document confirming that you are genuinely being a gift, and the person giving you money will neither have a legal interest in the property you are purchasing nor will be asking for the money back.
It should include the amount you’re being given, as well as the relationship between the gift-giver and you.
Some mortgage lenders have their own forms to complete, but we’ve provided a template a gifted deposit letter to give you an idea of what needs to be included.
The person gifting the money should seek independent legal advice to understand they will have no interest in the property and no right to get their money back.
What if the gifted deposit is a loan?
This changes things entirely and could have a serious impact on your ability to get a mortgage.
Lenders will consider a loan like any other outstanding debts you have, which will impact on how much spare income you have to meet monthly repayments and, therefore, how affordable your mortgage will be.
But they don’t particularly like loans, as it introduces the risk that the deposit lender will have a claim over the property if their loan is not repaid.
For a mortgage lender to even consider this, a loan agreement will have to be drawn up between the two parties, detailing how much is being given, when it must be repaid, how much interest is being charged and what will happen if it is repaid. A solicitor should be consulted.
Once drawn up and agreed, this will need to be declared to your lender as part of your application.
Is a gifted deposit taxable?
You may have to pay inheritance tax on a gift if the giver dies within seven years of handing over the money.
Find out more in the Which? guide to inheritance tax and gifts.
What are the alternatives to a gifted mortgage deposit?
In recent years, a number of mortgage products have popped up that allow parents to help their children onto the property ladder without giving them a chunk of cash.
These are sometimes referred to as ‘family offset mortgages.’ Your family members put a 5% or 10% deposit into a savings account with your mortgage lender, with the money locked away for a fixed period, or until you’ve paid off a certain amount of your mortgage.
Alternatively, your family could act as a guarantor, where a lender puts a charge on your family’s property in order to help you secure a mortgage.
You can find out more in our detailed guide to options for parents and first-time buyers.
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No matter how much you have saved towards a property deposit, Which? Mortgage Advisers can discuss the options available to help you get on the housing ladder. Call us today 0800 316 4071 – or request a call back.
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