What is a Gifted Mortgage Deposit?
Written by Adele MacGregor
19th Feb 2020 (Last updated on 31st Mar 2020) 5 minute read
A gifted mortgage deposit is a cash gift, usually from a family member, which will cover part of or all of the deposit for a house.
For many first-time buyers, saving for a deposit can be a struggle and a gifted house deposit may be the only way they can get onto the property ladder.
In this guide, Compare My Move look at the logistics and legalities of a gifted mortgage deposit and what it means for your mortgage application.
What is a Gifted Deposit?
A gifted deposit is a financial gift for a house deposit, usually from a direct family member such as a parent.
It’s important to note that this must be treated as a gift and not a loan. Providing the deposit as a gift means that the gifter has no intention of ever owning the property and does not expect payment in return.
This differs from a mortgage deposit loan from parents or another family member. If gifting the money is not an option, some parents provide a loan to cover or contribute towards a house deposit. In this case, there is intent for the money to be paid back.
Gifted deposits must be made clear to both the mortgage lender and your conveyancing solicitor from the offset.
Who Can Gift a Deposit?
Mortgage lenders are usually satisfied with direct family members providing a gifted deposit, such as a parent.
“The Bank of Mum and Dad (BoMaD) continues to grow in importance in helping young people take their early steps onto the housing ladder, “ said CEO of Legal & General, Nigel Wilson.
“The intergenerational inequality that creates the demand for BoMaD funding continues to widen – younger people today don’t have the same opportunities that the baby-boomers had, including affordable housing, defined benefit pensions and free university education”
According to research from Legal & General and the Centre for Economics and Business Research, the “Bank of Mum and Dad” was set to lend over £6.5 billion in 2017, up from £5 billion in 2016, providing deposits for over 298,000 mortgages.
Gifted deposits from parents, grandparents or siblings are usually permitted without questions, but some lenders may not approve a deposit from aunts and uncles or cousins. This is also the case for distant family members. In this case, it is worth checking with a mortgage advisor if the gift will be accepted.
Mortgage lenders are far more cautious with gifted deposits from friends and as a result, this could slow down the mortgage application process. This is due to the risk of someone unrelated laying claim to the property in the future - and the increased risk of money laundering.
If your gifted deposit is from a friend rather than a direct family member, be aware that your choice of mortgage lenders will be decreased. Many lenders will not accept a financial gift from a friend as a deposit and if a mortgage offer is made, it may not be the best available. You must make sure you know how much mortgage you can afford to borrow.
How Much Deposit Can Be Gifted?
The gifted deposit can make up the whole deposit required or it can cover it in part, alongside your own savings.
Mortgage lenders will require a deposit of at least 5% of the price of the property. The gifted deposit would need to meet this amount or more if it was the only source of funds for the deposit.
As mentioned above, the gifted funds can contribute to savings to make up a larger deposit. The bigger the deposit, the better the mortgage deal offer will be. A higher deposit can also mean lower monthly mortgage repayments. You will also stand to pay back your mortgage quicker.
The amount of money gifted to the homebuyer can be as much or as little as the gifter wishes to give.
Proof of Documents
Mortgage lenders and solicitors have a legal duty to ensure that your gifted deposit is credible.
The person providing the gifts for the fund will need to provide personal documents to both your conveyancer and the lender. These should include photo ID (passport or drivers license) and proof of address (such as a bank statement or utility bill).
They may also be asked to provide bank statements so that your solicitor and mortgage lender can check how the funds have been accumulated.
What is a Gifted Deposit Letter?
In addition to the paper trail, your mortgage lender and conveyancing solicitor will require to check the gifted money is genuine and legal. Your conveyancer will also ask for a signed Gifted Deposit Letter.
This letter acts as a declaration from the gifter that they are supplying the funds without expectation of property ownerships or repayment.
The letter must provide details of both the gifter and the person receiving the gifted deposit. It will also need to be signed in front of a witness.
A Gifted Deposit Letter should include:
- The name of the person receiving the gift
- The amount of money being gifted
- Confirmation that the funds are a gift with no expectation of repayment
- That the gift is motivated by love rather than commercial interest
- That the gift does not give the person giving it any stake in the property
- Confirmation that the gift has come from a legitimate source, such as savings.
- The gifter’s relationship to the buyer
- The address of the property being purchased
Do You Pay Tax on a Gifted Deposit?
You would not be taxed on the gift itself, but if the amount gained interest in your bank or building society account before being used, it would then be taxed. This can be avoided by the gifter keeping the amount in their own account until it is needed.
Another tax issue to be aware of is if the person(s) gifting the deposit dies within 7 years, you may be liable to pay inheritance tax (IHT) on the amount gifted. If this is a concern, it would be worth contacting a financial advisor.
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