Saving up enough to make a deposit on a property can be a real challenge.
Luckily, first time home buyers can get a mortgage with a gifted deposit. Put simply, a gifted deposit is a monetary gift, usually coming from a family member, that is used as a full or partial deposit on a house.
This article will explain everything you need to know about a gifted deposit and proof of funds required to show the lender that your deposit gift is legitimate.
When gifting a deposit to someone, there is a mandatory process to follow.
You will need to complete the following steps:
Let’s take a closer look at each of these.
A Gifted Deposit Declaration is a document that confirms that the gifted deposit mortgage comes from a legitimate source and that it does not have to be repaid. This document is provided by the family member who gifted the money to the home buyer.
The Gifted Deposit Declaration should include the following information:
The document needs to be signed and dated by the donor in the presence of a witness.
Without a gifted deposit declaration, the lender may not accept the gifted deposit as part of the mortgage.
The lender will require proof of ID to comply with anti-money laundering laws. These include:
Whether you need to provide original documents or copies (certified or otherwise) depends on your mortgage provider or solicitor.
As part of AML laws, the gifter must prove where the money for the gift came from.
For the most part, it will come from the sale of an expensive asset (typically a property), a pension drawdown or sale of shares and stocks. These are simple enough to document and prove.
It becomes trickier to prove when funds have been accumulated over a longer period of time or if funds come from multiple sources. In both cases, you would have to explain the source of funds in detail to comply with AML regulations.
Here is a brief breakdown of the most common question when gifting money for a mortgage.
A gifted deposit for a mortgage can be given to anyone buying a property by parents, children, or friends. However, bear in mind that some lenders might only accept mortgages with a gifted deposit from immediate family members, such as grandparents and parents. Friends and distant family might be more problematic.
For instance, if you are accepting a mortgage deposit gift from a friend, it could be harder to prove that it is, in fact, a gift and not a loan. In addition, most mortgage providers will not accept a gifted deposit coming from the person owning the property as they might consider them to have a stake in the home in question.
No, lenders could rule out gifted deposits. On top of that, they could also impose certain conditions on the deposit. For instance, during the Covid-19 pandemic, a lot of mortgage providers imposed stricter rules and only accepted gifted deposits of up to 25% on a mortgage with a 90% LTV ratio. The minimum deposit for home loans also went up to 10% instead of the usual 5%, mortgage statistics from last year show.
The rules have since relaxed, however, some lenders still might require first-time buyers to put up a minimum of 5% of their own money, especially if their credit rating is not very good.
Each person can give away up to £3,000 in tax-free allowance a year. Any unused allowance can be carried over, so both parents can gift £6,000 each (as long as they haven’t gifted any money to anyone else).
If the amount of the mortgage deposit gift is greater than this, then it is subject to inheritance tax if the gifter dies within seven years of gifting the deposit. The gift will be taxed on a sliding scale, so if your total estate (including the gift) reaches over £325,000, up to 40% of tax will be due.
In case you go bankrupt within 5 years of gifting the deposit, then the purchase may be revoked and the funds used to pay your debt.
If your child is accepting gifted money for a mortgage but is planning on purchasing a house with a partner or friend, it’s important to have securities in place in case the two choose to go their separate ways later on.
One way to do this is to talk to the solicitor working on the property. They could draft a declaration of trust or deed of trust, stating that the money was given to your child and not their partner. This way, your child will be able to keep the gifted deposit even if the relationship ends.
There is no limit on how much you can gift as a house deposit.
Yes, gifted deposits must be declared to lenders as part of the mortgage application process. This is to ensure that all funds being used for the purchase of a property are legitimate and meet anti-money laundering regulations, as well as to prove to the mortgage provider that you are not expecting your gift to be repaid.
Even if the money has already been transferred to the account, the lender and conveyancing solicitor must be informed that the deposit in question is a gift and not a loan.
A gifted deposit is not the only way to help someone make a deposit on a first home.
Here are three alternatives to using a gifted mortgage deposit:
This is when a close friend or relative agrees to cover the mortgage payments in case you can’t. However, if the borrower defaults on the payments, lenders have the power to pursue the guarantor. In addition, if the guarantor has used their own home as a guarantee for the mortgage, then they are in danger of losing the property as well.
Also known as ‘family deposit mortgage’, this option allows relatives or friends to place 5 to 10% in a savings account with the lender. The mortgage is then offset against those funds. The funds must be in the savings account for a certain period of time to cover potential shortfalls.
This is a mortgage that permits two individuals to collectively purchase and own a home. This is mostly done when someone decides to buy a home with a friend or family member. In this case, both homeowners will be liable for loan repayments; however, a bigger mortgage could be obtained as two incomes are taken into consideration.
Bear in mind, though, that if you already own a home, the new one will be considered as a second property and thus subject to a 3% Stamp duty. If this is the case, you could remortgage your existing property to buy another one with your spouse, partner, child or parent.
Whatever option you go for, make sure you talk to a financial advisor before making a final decision.
When gifting money for a mortgage, it is important to carefully consider all pros and cons of the transaction. While it is an excellent way to help a loved one purchase their dream home, the procedure is not without risks.
Be sure to consult a solicitor or mortgage broker who will explain the process in detail and inform you of all aspects involved in providing a gifted deposit and proof of funds.