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Gifted Mortgage Deposit: Everything You Need to Know

House prices have traditionally risen year after year. Unfortunately, incomes have not risen at the same pace, and even the occasion price dip doesn’t make a substantial difference. In short, house prices are up, and the amount of funds you need for a deposit has increased.

Traditionally, buyers would save for a deposit, delaying a property purchase until they have enough funds. Unfortunately, the cost of living makes this increasingly difficult, a gifted deposit can be the answer. In essence, a lump sum is given to the buyer to be used as a deposit.

However, it’s not as simple as your parent giving you thousands of pounds.

Image showing a happy couple with a gift

Understanding the basics of gifted deposits

A gifted deposit is a financial donation from one person to another. Anyone can give you a gifted deposit. Before you accept one, you should check with a specialist mortgage adviser, most mortgage companies will only accept them if they have been given by a family member.

It’s important that the gifted deposit is a gift, there should be no strings attached, no demand for a share in the property, and no agreement to repay the money at any point in the future.

Parents are the most common source of gifted deposits. Grandparents are also a popular choice. Other direct members of the family, such as a sibling, could also gift funds. These people may have spare funds available or they can choose to release equity in their own property or even drawdown pension funds.

Eligibility criteria for receiving a gifted deposit

If you’re considering a gifted deposit you should also speak to a specialist regarding the various help to buy schemes. They can help you decide the best way forward and be certain that you understand the expectations of lenders with respect to gifted deposits.

  • You must be able to prove where the funds have come from
  • Most lenders will demand that the gifter is an immediate member of your family, proof is required
  • Your target lender must accept gifted deposits
  • The gifter will need to supply a gifted deposit letter
  • All other standard mortgage eligibility criteria will still need to be met

The responsibilities of the gifter

The gifter is being extremely generous, but generosity isn’t enough by itself. They must be giving the money freely and have no expectation for its return. They will be obliged to confirm this to the lender. In addition, they will need to demonstrate where the funds have come from. This is to conform with money laundering regulations.

Most importantly, they will need to provide a gifted deposit letter, which should state the following:

  • The name and address of the gifter
  • The name and address of the person receiving the gifted deposit
  • Where the funds have come from, savings, property equity, etc. This will need to be backed up with proof
  • Relationship between gifter and receiver, again this may need to be proven
  • Amount of funds being gifted
  • Date of the gift
  • Acknowledgement that the gifter doesn’t expect to be repaid or gain a stake in the property
  • Knows that the receiver is financially solvent – this may need to be backed up with evidence

Before you start writing the letter, check with the intended lender. Larger lenders usually have a dedicated gift deposit form to be filled out. Smaller lenders will require a letter with the above information.

You should note, there is no limit to how large the gifted deposit can be.

Lender policies on gifted deposits

All lenders will require a gifted deposit letter or the completion of their gifted deposit form. Every lender is different, you’ll need to check with them if they have any other specific requirements. Some lenders won’t accept gifted deposits, most simply need to be assured that the funds are a gift and not expected to be repaid.

All lenders that accept gifted deposits are likely to offer better deals for first-time buyers. As with any mortgage, the larger the deposit the lower the risk to the lender.

Image showing a close up of a letter being signed

Legal and tax implications of gifted deposits

Legally, an individual can give away up to £3,000 a year tax-free. Anything over this value must be accounted for in the value of the gifter’s estate. This means, that despite giving the funds away, they are still valued as part of your estate. If the gifter dies within 7 years of the gifted deposit, it could be liable to inheritance tax. This is only applicable if their estate is worth more than £325,000.

Assuming they don’t die within seven years, the gift remains tax-free.

You should also note that a gift tax can be charged on any gift over £17,000. The gifter will need to file a gift tax return. If the value of their gifts exceeds the lifetime allowance a tax will be due.

Preparing documentation for a gifted deposit

It’s best to get everything in order before you apply for a mortgage, especially when dealing with a gifted deposit. This is what you’ll need:

  • The gifted deposit letter (as previously discussed)
  • Proof of where the funds originated – remortgage details, house sale, bank statements, etc
  • ID for the gifter and the receiver
  • Income and debts for the receiver along with a credit report to prove solvency

The gifter will also need to declare the gift on a gift tax return and the receiver will need to declare it on their tax return

Common challenges and how to overcome them

One of the biggest challenges facing buyers with gifted deposits is finding a lender that will still offer a mortgage. Not all lenders will. In that case, we recommend you our first-time buyer's guide.

Of course, if you don’t mind delaying your house purchase, you can receive £3,000 as a tax-free gift from a relative every year until you have enough. This can add up quickly. For example, if your grandparents are gifting you a deposit, they can each give you £3,000 a year. That’s £18,000 in three years and you don’t need to declare it as a gifted deposit!

This approach can also help you navigate the lenders who insist only 25% of a deposit can be from gifts.

The other major challenge is proving where the funds have come from. This may require years of bank statements if it has been saved by the gifter over many years.

It’s also worth noting that rules and regulations can change. Professionals keep up with these changes, which is why it’s beset to consult with Moneysprite advisers before making a decision.

Maximising the benefits of a gift with expert advisers

Gifted deposits are only one option. However, they are a useful solution for those struggling to get on the property ladder. Other options include guarantor mortgages, springboard mortgages, or even a joint mortgage. It’s important you discuss all the options with mortgage advisors to ensure you get the best solution for your situation. We’re available now, contact us for a consultation.

If you need help with your mortgage, call us today: 0345 450 4660

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