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 you are using as a deposit is definitely a gift, and not a loan or a right to some ownership of the property. This is to prevent problems such as your parents later claiming that the money was a loan, and not a gift.
A gifted deposit is a deposit used for a property purchase that is wholly or partly formed of cash given to you as a gift by a friend or family member.
It’s important to follow the correct procedure for gifting a deposit to avoid delaying your purchase, as there will likely be a hold up in the conveyancing process otherwise.
In many cases, you will also need the right evidence and legal documents to prove the money is indeed a gift that the family member or friend does not expect to be paid back to get your mortgage approved.
Gifted deposits that come from family members are more common and are generally preferred by lenders, so you may end up facing further delays if someone else is providing your deposit.
To use a cash gift as a deposit, you need proof that the gifted deposit is not a loan or being offered in exchange for any rights to the property you plan to buy. A signed document from the person giving you the money stating that it is a gift and they will have no rights to the property or to ask for the money back should do the trick.
Some mortgage lenders have their own legal forms for this process. If that’s not the case, your cash gift deposit letter should come from the family member (or friend) gifting the money and should state:
That they are assisting you to buy a home (with the address of the property you want to buy)
How much they are gifting you
That they understand a gift is an act of kindness and love, not one motivated by commercial interest
That they understand the gift is unconditional, non-repayable and does not give them any right over the property or the mortgage provided by (lender's name)
That their finances are in good order at the time of writing and they have no reason to believe they will go bankrupt in the future
It should then end with their signature, name, and the date and should also be signed by a witness.
If you have any doubts about the process, your solicitor or conveyancer should be able to help. He or she will also need proof of ID and proof of address from the person gifting the deposit money, in accordance with anti-money-laundering rules.
This could be a passport or driving licence, plus a recent bank statement, utility bill, or letter from HMRC. Check with your solicitor whether originals are needed or copies will do.
In some cases, your lender or solicitor may also want to see bank statements from the person gifting you money for a house deposit. Once again, this is in accordance with anti-money-laundering procedures, the aim of which is to show where the money comes from.
Most mortgage lenders will refuse to offer you a mortgage if the person providing your gifted deposit views it as a loan. There are two main reasons for this:
All outstanding debts make it harder to get a mortgage because the repayments on them have to be deducted from your income – meaning there’s less left to meet your mortgage payments.
Being loaned the money for a deposit means your family member (or friend) could claim some kind of legal right over the property if you are unable to pay back the loan.
If your family member wants to help you without giving you money, a better way to do it is therefore via a family offset mortgage. With a mortgage of this kind, your family member puts money into a savings account that is offset against the amount you owe on your mortgage – making your repayments more manageable.
They then get their money back – sometimes with interest - once you have paid off a certain percentage of the mortgage, say 25% or 30%.
If the family member giving you a mortgage deposit dies within seven years of making the gift, and their estate is liable for inheritance tax, you will have to pay up to 40% tax on it.
Your gifted deposit is also at risk if the family member who gave you the cash goes bankrupt, and the money needs to be recovered to pay their creditors.
Could a guarantor mortgage help?
With a guarantor mortgage, a family member guarantees your mortgage – meaning they will be held responsible for paying it off if you fail to keep up with repayments. The interest rates on guarantor mortgages are often higher than on standard deals, but they can be useful for those who can't get a big enough deposit together to buy a home.
Remember though that the family member concerned could lose their savings or their home (whatever they have put up as security for the loan) if you become unable to pay your mortgage repayments. It’s worth pointing out that they will also usually be locked into the agreement until you've brought the Loan to Value ratio – or the percentage of the property’s worth you are borrowing, down to around 75%