In recent times, house prices have risen to such an extent that the average deposit needed by first-time buyers has significantly increased. Saving such a huge amount is often seen as unattainable for many.
Consequently, numerous aspiring homeowners seek financial assistance, such as gifted deposits, to augment their savings. This article is part of a series of mortgage types in the UK, to help you with guidance for a smooth homeownership.
What is a gifted deposit?
A gifted deposit occurs when a family member or another person provides you with a portion or the entire deposit for purchasing a property.
It's a non-repayable gift, not a loan, making it distinct from other forms of financial assistance.
For first time buyers, using a gift for a mortgage deposit can be a stepping stone onto the property ladder, as it may enable you to secure a mortgage with more favourable terms.
Mortgage lenders generally require a written statement, often called a gifted deposit letter, confirming the gift's non-repayable nature. This letter is a key document in the mortgage application process.
Gifted deposits for first time buyers
In the current economic climate, with rising house prices outpacing savings rates, gifted deposits have become increasingly relevant for first time buyers in the UK.
They offer a viable solution for those struggling to accumulate a significant house deposit on their own.
Mortgage lenders are aware of this trend and often have specific policies regarding gifted deposits. Acceptance of such deposits can vary, but most lenders acknowledge their role in helping first time buyers enter the market.
Prospective homebuyers must seek independent financial advice to understand how a gifted deposit might affect their mortgage application and any tax implications, particularly regarding inheritance tax.
Differences between gifted deposits and loans
Gifted deposits stand apart from loans. While loans require repayment, often with interest, a gifted deposit is just that – a gift. Both the giver and receiver understand this distinction. Mortgage lenders scrutinise the nature of the deposit to ensure it's genuinely a gift and not a loan in disguise.
A loan implies a future liability, affecting the buyer's mortgage affordability. Lenders assess the buyer's ability to manage mortgage payments alongside other financial commitments. A loan, therefore, could impact the mortgage offer.
Gifted deposits, on the other hand, carry no such implications. They don't affect the buyer's monthly outgoings, thus enabling a more favourable mortgage deal.
The mortgage applicant needs to declare the nature of the deposit clearly. Misrepresenting a loan as a gift can lead to legal complications. A signed letter from the gift giver often accompanies the deposit, explicitly stating the gift's nature and confirming that it's not a loan.
Mortgage lenders have a keen interest in the source of a deposit. They conduct thorough checks to ensure compliance with anti-money laundering regulations. This scrutiny extends to gifted deposits. The person gifting the deposit may need to provide bank statements and other documents proving the legitimacy of the funds.
In the case of larger gifted deposits, the mortgage lender may delve deeper. This could include examining the financial stability of the person gifting the deposit. Such scrutiny ensures that the gift doesn't financially overburden the giver and is sustainable.
How gifted deposits work in property purchases
Most mortgage lenders allow using a gifted deposit. But some might not accept gifted deposits.
Gifted deposits offer a pathway to homeownership by contributing towards the deposit for a mortgage. This process begins with the person giving the money and transferring it to the prospective home buyer.
When a family member gifts a deposit, both the giver and receiver must understand the commitment. Mortgage brokers often stress the importance of transparency in these transactions.
You can even add your own savings to a gifted deposit.
Documentation required for a gifted deposit
Gifted deposit letter
A primary document in the process of using a gifted deposit is the gifted deposit letter. This letter, penned by the gift giver, confirms that the money is a gift and not a loan.
It clarifies that the giver has no stake in the property and expects no repayment. Most lenders require this letter as part of their anti-money laundering checks.
It should include details like the amount gifted, the relationship between the giver and receiver, and a declaration of the gift's nature.
A conveyancing solicitor often reviews this letter to ensure it meets the lender's requirements. The letter plays a big role in the mortgage application process, providing lenders with the assurance needed to accept the gifted deposit.
Proof of funds and bank statements
These involve presenting bank statements from the gift giver, showing the origin of the funds. Lenders scrutinise these statements to ensure the money is not from dubious sources.
The bank statement should ideally show a steady accumulation of funds or a clear source, like savings or an inheritance.
Legal and tax implications of gifted deposits
If the person giving the gift, passes away within seven years of gifting the money, the recipient may have to pay inheritance tax on the gifted amount. This is a very important aspect of UK law that both parties should consider before proceeding with a gifted deposit.
Inheritance tax considerations
Inheritance tax (IHT) in the UK becomes relevant when discussing gifted deposits. The value of the gift may be subject to IHT, if the giver passes within seven years. This rule ensures fair taxation while allowing for generous gifts.
The current IHT threshold stands at £325,000. Beyond this, the tax rate is 40%. However, for a deposit gift, the seven-year rule applies. If the donor survives seven years post-gift, the amount escapes IHT.
Mortgage repayments and affordability calculations
The lender will scrutinise all your finances and determine how much you can borrow. A larger deposit usually means lower monthly payments, making a more expensive home affordable.
However, lenders also assess if you can sustain these payments. They consider your income, outgoings, and financial stability. The presence of a gifted deposit doesn't alter these calculations, ensuring you don't overstretch financially.
Mortgage brokers often assist in navigating these nuances, offering tailored advice for your situation.
Policies of mortgage lenders on accepting gifted deposits
UK mortgage lenders scrutinise the source of the gift, often requiring photo ID and proof of funds from the donor. They also check the donor's relationship to the buyer, usually preferring close family members.
How gifted deposits affect mortgage deals and applications
A larger deposit, including a gifted amount, can lead to better mortgage rates due to reduced lender risk. Mortgage applications with gifted deposits may need more documentation and checks.