Scraping together a deposit is one of the biggest obstacles for first time buyers getting on the property ladder. Even with low deposit mortgages and shared ownership schemes, as house prices rise, a 5% or 10% mortgage runs into the tens of thousands of pounds.
Parents, grandparents, and even friends often want to help their loved ones get onto the property ladder. They’ll provide some – or all – of a deposit sum to help them achieve eligibility for a mortgage. But how do gifted deposits work – and what does it mean for your mortgage requirements?
What is a gifted deposit?
UK tax law means people can’t just give you money. Family members can gift as much or as little as they would like. Be aware of a potential inheritance tax. If the person passes away within seven years who gifted you the money, you will have to pay inheritance tax on the amount given to you.
A deposit is usually at least 10% of a mortgage. With average house prices around £233,000, this means you’ll need to have at least £24,000 ready to pay your deposit. A gift can help a lot towards this.
A gifted deposit means you’ve been given money towards, or to fully cover, your deposit amount. This is NOT a loan nor does the person giving you the money have any stake in your property. The money must be given freely, with no requirement or expectation of repayment at any time in the future.
Who can give you money for a gifted deposit?
In theory, anyone can gift you a deposit. In reality, however, most mortgage lenders prefer if the person giving you the money is a relative, such as a parent, sibling, or grandparent.
Some lenders have even stricter requirements, stating it must be a parent that gives you the money.
If you’re not sure whether your relative or friend can gift you a deposit, speak to a local mortgage adviser in Willerby to check whether certain lenders would accept your circumstances.
What are the rules of using a gifted deposit as a first time buyer?
The main thing when you’re using a gifted deposit is that you must prove the money is a gift, without expectation of repayment.
A Gifted Deposit Letter is usually all that’s required. For this, you must include:
- Their name
- Your name
- The total sum given
- A statement that it is a gift
- A statement that the gift has no commercial interest
- Confirmation that the gift giver has no financial or commercial stake in the property
- Confirmation that the gift giver is financially solvent and in a position to provide the gift
You need to have this letter signed by a witness too. Your solicitor will ensure the letter is airtight as a legal statement for mortgage lenders to consider during your application.
The person providing the gift will need to prove they have the funds to give you too. Bank statements, including evidence of the source of the money, should do this. If they’ve been saving for years and years, evidence of regular deposits into the account help with anti-money laundering checks. If it’s a result of an inheritance lump sum, you may need to provide a copy of the Will of the deceased.
The person providing the gift also needs to provide photo ID and two forms of address evidence (such as bank statements or Council Tax letters).
What happens if the gift giver dies - is inheritance tax due?
If you’re accepting a lump sum gift as a type of ‘living inheritance’ from an older relative, there’s a few things you need to be aware of. If they die within seven years of providing you the gift, you may have to pay inheritance tax on it. Of course, this risk lies with a gift provided by someone of any age, but statistically older people are more likely to pass away during the seven-year inheritance tax period.
They also cannot be seen to be ‘depriving themselves of capital’. For example, if by giving you the gift, they would then qualify for certain state benefits, this could cause significant complications.
My parents want to help but can't raise a deposit - what options do they have?
If your family want to help you buy a house, but can’t raise a lump sum gift, there are other options. For example, there are now 100% loans for student property purchasers. The deposit is secured against the already owned parental property, meaning students in a university town can buy a house for their studies.
The rent gained by housemates is often enough to pay for monthly mortgage payments. Within a few years of graduating, students could own their property outright, without ever having saved a large lump sum deposit.
Similar schemes are also available for parents who are mortgage-free and want to help their adult (non-student) children buy their first house. Family off-set mortgages provide yet another option for parents to help their children get on the property ladder, too.
Speak to your mortgage adviser about your gifted deposit options
Using a gifted deposit can help increase your eligibility for a mortgage, reduce your mortgage term or payments (thanks to a larger deposit), and help you get onto the property ladder.
However, knowing which lenders accept gifts from relatives or non-relatives is essential to finding out if it’s the right route for you. There may be other ways your relatives can help you buy a home instead.
With help considering your options, don’t hesitate to contact your local mortgage adviser in Willerby today.