What Is A Gifted Deposit?
If you are purchasing a property and somebody, usually a family member or a close friend, offers to pay the deposit for you or part of it, then that payment is referred to as a gifted deposit.
The deposit or the part of it that is paid by somebody else is a gift to you and, generally, often will be no or no express agreement between you and the deposit payer that you repay the deposit money.
Whilst it’s great to be in the position to have family support, there are still things that you should be aware of before you accept the money and use it.
Money Transferred To Your Bank Account?
Do not make the mistake of thinking that your parent or friend can just transfer the money into your bank account and for you to say the money is yours.
During the conveyancing process your conveyancing solicitor will ask for proof of funds and to confirm where the money originated from and the gifting process will still need to be followed. You will simply incur more legal costs looking into this.
So if you are getting help from someone else, ask them to hang on to the money until you’ve taken legal advice so you know how best to proceed.
Who Can Gift A Deposit To A Homebuyer?
There might be some restrictions on who can gift a deposit to you when purchasing a property. The restrictions that may apply to your purchase of a property with a gifted deposit will depend on the terms and conditions of different mortgage lenders.
For example, if your parents are looking to financially help you with the purchase of your new home, they can do so by gifting the deposit to you and they will usually be permitted by the majority of mortgage lenders to make a deposit gift to you.
Also, if any of your other immediate family members such as your siblings or grandparents are willing to pay the monies for your deposit, most mortgage lenders will generally permit them to do so.
However, if any distant family member of yours including aunts and uncles or a close friend of yours want to make a gift of the deposit monies to you, they may not be permitted to do so by some mortgage lenders, as lenders may be concerned that more distant relatives or friends are more likely to ask for the money back at some stage.
Defaulting on a payment?
If you couldn’t make the repayment, this might make the person who lent you the money take action to make you sell the property, which could have an affect on your mortgage provider.
In addition, mortgage lenders are not likely to accept a gifted deposit from the vendor i.e. seller. This situation might arise for example when you are purchasing a property from your parents and they are also willing to pay the deposit for you. Some mortgage lenders might not allow this.
So, it is really recommended that you check with your mortgage lender what their terms and conditions on a gifted deposit are before you accept a gifted deposit from your immediate or distant family or a close friend. It’s a good idea to find this out as early on as possible to reduce the risk of wasting time and money.
Your solicitor will need to get ID from whoever is gifting the deposit. This is so that they can comply with internal anti-money laundering procedures. This will include a photo ID and proof of address.
Do You Need To Show Proof Of The Gift Of The Deposit To Your Mortgage Lender?
Generally, yes. Your mortgage lender might ask you to provide it with a written declaration from the person who is gifting you the deposit to confirm it is a gift and that you do not have to pay it back to them.
If, however, you have agreed with the person paying the deposit on your behalf that you will pay them back the full deposit or part of it, then that will be considered as a loan by most mortgage lenders and might not be allowed. They will want there to only be one lender (them!) so that there are not competing interests.
No Right To The Property
The person gifting the deposit may also be asked on the gift deposit form whether they expect to have any equity or interest in your property, or whether they expect to have the right to live in it after purchase. They then might be asked to sign a declaration stating they do not wish to have any legal interest in the property.
So check with whoever is going to lend you the money whether they do think the loan is going to give them any rights, so you are both clear at the outset on what they are giving and what (if anything) they are getting in return.
If the person gifting you money passes away within seven years then inheritance tax may be payable on the gift amount. This will only apply if the person’s estate (including the gift) is worth more than £325,000 up to April 2019. This figure may change as tax laws change.
If the person making the gift to you were to die or become bankrupt within five years of the give being made, you may need to repay the amount gifted to you.
Advice For First Time Buyers – Alternatives To Gifting A Deposit
There are alternative ways that first time buyers can get on the property ladder and different ways borrowers can get their deposit together.
- This includes parents being named as a guarantor on a 100% mortgage, offsetting their savings or even taking out a joint mortgage with their children – which can be altered at a later date.
- If parents are in no position to help their children then government schemes are available such as Help to Buy or Shared ownership.
- A Help to Buy Isa could help you save a larger deposit so that you don’t need financial help for anyone.
Otherwise if none of the above are available to you then you may have to save for a larger deposit.
It is advised to speak to a mortgage adviser to see which option is best for you and your available finances. They will be able to guide you towards lenders that accept the type of gifted deposit you have and help you choose the right mortgage deal along with it.
5 Steps To Help You Purchase A Property With A Gifted Deposit
1. Inform your conveyancer as soon as possible in order to speed up the process
Once your offer has been accepted, you will need to inform the conveyancer and any people you need to that some or all of the deposit has been gifted to you.
There are some formal requirements that are needed to be completed by your conveyancer. These are to comply with the anti-money laundering rules. If you provide the information at an early date it should not affect the completion date.
2. Provide evidence the money was a gift and not a loan
This evidence is just written consent from the person making the gift, it is to confirm that it was a gift not a loan. This letter will also need to provide confirmation that the person who has made the gift does not have any legal interest in the property.
3. Prepare the necessary bank statements
This is part of the anti-money laundering checks that the conveyancer will need to complete. It is just to show that the money has been earned legitimately. This could just be showing one bank statement or could be more. Your conveyancer will let you know the details of what you need to provide
4. Understand the meaning of a gifted deposit
The person making the gift must understood that once the process has been completed that they will have no rights to either the money or the property.
Disclaimer – our articles are designed to give you guidance and information. There is no substitute for proper direct advice, particularly as everyone’s circumstances are different. If anything in this article may affect you, please contact us for advice that is specific to your circumstances.