It’s not easy to save up a reasonable deposit for a new home. For first time buyers especially, that deposit is likely one of the most considerable sums of money they’ve ever had to save. With such a challenge, it’s a small wonder that gifted deposits are so popular.
House prices are high, and it’s becoming more challenging to get onto the property ladder. The cost of a house deposit has shot up, and that makes the property ladder a very distant dream for far too many people. Financial help is possible for some people, though, in the form of a gifted deposit.
As you might expect from the name, a gifted deposit is when someone gives you some money to help you buy a new home. It could be the total amount of the necessary deposit or simply a chunk of it. Sounds simple, right?
It’s not as straightforward as a parent or loved one depositing some cash into your savings account and wishing you well. It’s a little more complex than that, so let’s break it down.
When you want to buy a home, you need substantial money. The average request from mortgage lenders is that you have at least 5% of the total mortgage. But if you have more, then you have access to more options. You won’t need to have such a large mortgage, meaning that your monthly repayments can be significantly lower.
With a larger deposit, you also get more choices about who to sign up with as your mortgage provider. You can access cheaper mortgages the larger your deposit. So if you’ve saved up that 5%, you’ve done exceptionally well. But with a gifted deposit, a loved one can give that deposit a little (or even a considerable) boost.
A gifted deposit is just that: a gift. It’s not a loan or any kind of scheme. It’s a cash gift that you are not legally required to repay. Unlike a joint borrower sole proprietor mortgage, the person gifting you the cash won’t have their name listed on the property’s title deeds. So they don’t have any legal interest in the property at all. So for any parent that is looking for ways to help their children get on the property ladder, a gifted deposit is a no strings attached option.
In most cases, a gifted deposit is given by a family member (the bank of mum and dad is still one of the biggest mortgage lenders in the UK). The relatives gifting the deposit will usually be immediate family members, although some mortgage lenders will allow a partner to give a deposit in some cases. However, you will find that there are a lot of mortgage lenders who won’t accept a gifted deposit from anyone other than your parents.
In some cases, the person selling you the house will offer a gifted deposit in the hopes of a faster sale. This isn’t too common, but mortgage lenders are rarely going to agree to it. That’s even going to be the case if you’re planning to buy the property from your parents or other close family members.
It can take a lot of research to find the right mortgage, whether or not you’re using a gifted deposit. One option to make it easier to sort through those options is a mortgage broker. While not everyone needs a mortgage broker, they can be particularly beneficial if you’re getting a gifted deposit. They will be able to help you find the right deal depending on the amount you are gifted.
You’ll also need to let your conveyancing solicitor know that you’ve received a gifted deposit. One of the responsibilities of the conveyancing solicitor is to ensure that everything is legally above board, including anti-money laundering laws. There’s more work involved with a gifted deposit, so there will be an additional cost, but your solicitor should be 100% transparent about that.
Your solicitor will then get as much information as possible about how you will fund your house purchase. If you’re receiving a gifted deposit, your solicitor will then write to the person giving the gift to a) get confirmation of their identity and b) get evidence of the source of the gifted money. The gifter will also need to provide a letter that states they won’t be living in the house and confirm they have no legal interest in the property.
A solicitor will also advise the gift-giver to get independent legal advice. Some mortgage lenders won’t accept a gifted deposit if the gifter hasn’t got their own legal representation. There may also be tax implications, so the gifter should also contact an accountant.
There are no restrictions on how much your relative gives you as a gifted deposit in most cases. But some mortgage lenders will impose a limit. You need to bear in mind and get advice about whether the gift is subject to inheritance tax.
People are legally allowed to give away up to £3,000 every year without it being subject to inheritance tax. That money can roll over from year to year, so it’s common to find parents gifting a deposit in the region of around £12,000. In those cases, inheritance tax isn’t an issue.
Inheritance tax is something to find out more about if you’re getting a gifted deposit. If the worst happens and your relative passes away before seven years have passed since giving the gift, then that amount might still be classed as part of their estate and subject to inheritance tax.
This is a very common question because most people buy their first home with their partner. If relationships break down and the couple splits up, gifted deposits can make it very complicated to determine who gets what in a divorce. What can be done is that the parents gifting the deposit can get a declaration of trust (or deed of trust) from their conveyancing solicitor. This will legally declare who was gifted the money (i.e. specifically gifted to your son or daughter).
Should the couple split up, ownership of that gifted deposit is clearly and legally defined as owned by the son or daughter.
There are many different types of mortgages available and many ways for relatives (or even friends) to help you build up your deposit. Some of the options you may encounter include the following.
With this kind of mortgage, a family member will put down around 10% of your deposit into a savings account. The mortgage will link to that savings account. The money in that savings account will need to be untouched for a pre-established period. If you then move into your new home and don’t make the necessary monthly repayments, your family members can lose the total amount in the savings account.
This is an extremely common way for parents to help their children get onto the property ladder. A guarantor mortgage is when a friend or family member agrees to act as a guarantor on your mortgage. So should you stop making repayments, they may have to pay. They may even lose their savings and in some cases their home. It’s very important to be clear about guarantor mortgages and always get legal advice before agreeing to act as a guarantor.
This remains a very commonly used option when parents and children buy the property together. Both names will be on the mortgage and the property title deeds. It can be an easy option, but if the parent already has their own home, they will likely get hit with a higher stamp duty charge.
This is similar to a joint mortgage, but the parent doesn’t get their name listed on the title deed, only on the mortgage. It means they can avoid second-home stamp duty, but it does mean the parent has no legal rights regarding the property.
There are also Help to Buy mortgages, also known as equity loans. These can get highly complex, but it’s always worth finding out about them.
Mortgage lenders can change their rules whenever they like. When Covid started affecting the world, many mortgage lenders changed the rules regarding gifted deposits. Those rules have since been relaxed, but it’s a timely reminder that doing your mortgage research is essential, whether or not you’re getting a gifted deposit.
Gifted deposits are very common, especially among first-time buyers. Add in the extremely high cost of living and the shocking state of rent prices, and it’s obvious why parents are finding themselves having to help their kids buy a home.
Don’t forget that if you will be getting a gifted deposit, it’s always a good idea to get in touch with your conveyancing solicitor as early as possible. They can ensure that all of the paperwork is begun and that any roadblocks to your purchase are tackled. If you have any questions about gifted deposits, get in touch. We’ll arrange a call back to learn more about what you need with a free, no-obligation consultation.
Alternatively, you can learn more about what happens during conveyancing with our free downloadable conveyancing and property guide.
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