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Gifted deposit for a mortgage

Gifted deposit for a mortgage

Many first time buyers get help from their parents, but if you are being gifted a deposit, there are some things you need to watch out for first.

Lenders and solicitors will often want reassurance that the money being gifted to you as a deposit is exactly that, and not a loan or a right to some ownership of the property. For example, there is a risk for the mortgage provider that your parents might later claim that the money was a loan, and not a gift.

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What is a gifted deposit?

A gifted deposit is when some or all of the money you put up for a deposit is given to you as a gift by a friend or family member.

If the correct procedure for gifting a deposit is not followed then you could end up delaying completing the purchase, as there will likely be a hold-up in the conveyancing process.

Lenders may also delay approving a mortgage as a result, so it's important you have the right evidence and legal documents to prove the gift is indeed a gift that the family member or friend does not expect to be paid back.

Many lenders prefer that you get a gifted deposit from a family member, rather than a friend, so be wary of this as you could end up facing further delays simply for getting your deposit from a non-relative.

What do I need to use a gift for a mortgage deposit?

You need proof that the gifted deposit is not in exchange for any rights to the property you plan to buy, or in fact a loan. You can get this proof from your family member simply stating on a signed document that they are gifting you the deposit and have no rights to the property or any right to ask for the money back.

Some mortgage lenders will have their own legal forms to make it easier for your family member to gift you a deposit and complete this process.

The letter for a gifted deposit should come from the family member gifting the money and should state the following:

  • That you are assisting the buyer (your son or daughter, for example) to buy a home (include the address of the property)
  • How much you are gifting them
  • That you understand that a gift is an act of kindness and love, not motivated out of any commercial interest
  • That you understand that the gift is unconditional, non-repayable and does not give you any right over the property and will not interfere with the security of the mortgage (include the lender's name)
  • A confirmation that your finances are in good order at the time of writing and you have no reason to believe that you will become bankrupt in future.
  • Signature, name, and date and signed by a witness

It is best you get a legal letter template from the mortgage lender if they provide one, or speak to a solicitor. A solicitor may charge extra for this service, so check first, but it will help avoid any nasty surprises further on.

Your solicitor will also need proof of ID and proof of address from the person gifting the deposit money, in accordance with anti-money-laundering procedures. The person gifting you the money will usually need to provide the following:

  • ID: Passport or driving licence
  • Proof of address (minimum of two): Bank statement, utility bill, driving licence or HMRC letter

Speak to the solicitor in advance to double check what ID will be needed and if they are fine with copies or prefer originals.

The lender or solicitor may also want to see bank statements from the person gifting you. This does not always happen, but it's worth being prepared for. This is again in accordance with anti-money-laundering procedures.

Sometimes when you have wealth accumulated over years, it can be difficult to prove the origins in a few months of bank statements, so make sure the person gifting you can easily prove where the money came from.

What if my deposit is a loan from a family member?

Technically, any outstanding debts will contribute to your mortgage application, thereby making it more difficult to get approved. But with a loan for a deposit, the mortgage lender is likely to reject your application outright.

This is because it could later be implied, if you were unable to pay back the loan, that your family member would have some kind of legal right over the property. This would, in effect, damage the security and integrity of the mortgage they were lending you.

One way for a family member to give you money for a mortgage that they could potentially get back is via a family offset mortgage. Your family member puts money into a savings account that is used to offset the mortgage and make repayments more manageable. Once you have paid off enough of the mortgage, the money your family member paid in will be returned to them, with interest, although this can take many years.

Will I pay tax on a gifted mortgage deposit?

If the family member giving you the mortgage deposit gift dies within 7 years and their estate is liable for inheritance tax, then you would need to pay some or all of it back.

Your gifted deposit is also at risk if your family member becomes bankrupt, and the money needs to be recovered.

Could a guarantor mortgage help?

A guarantor mortgage allows a family member to guarantee the mortgage. This means they would be held responsible for paying off the mortgage if you fail to keep up with repayments. Often, they would need to put up their own property as a guarantee and minimise the risk to the lender.

The rates can often be quite high and you would be putting a family member's finances at risk as well. The guarantor (your family member) will usually be locked into the agreement until you've brought the Loan to Value ratio down to a reasonable amount — usually around 80% (i.e. when you've paid off around 20% of the mortgage). This could take years, so think about the risks.

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