Gifted deposits

More and more aspiring first-time buyers are relying on gifted deposits to get a mortgage, but giving cash to buy a home carries implications.

Key points

  • Gifted deposits need to be a gift and not a loan, as borrowing can have an impact on your mortgage affordability
  • Different lenders have different rules surrounding gifted deposits, including who gives homebuyers the money
  • If the person gifting the money dies within seven years, inheritance tax may have to be paid

When you're looking for a mortgage, getting together the money for a deposit can be difficult, especially if you need a large amount.

More and more borrowers are relying on a gift of cash to build their deposit, especially if they're looking for deposits in the region of 25% rather than 5% or 10%; larger deposits will give borrowers access to more providers and better deals.

According to research by the Council of Mortgage Lenders (CML), in 2014, 52% of first-time buyers received help when buying a home, either from family or through government schemes such as Help to Buy.

"Parental help has become a crucial part of many aspiring first-time buyers' hopes of climbing onto the ladder," said David Hollingworth of London & Country.

Mortgages"That's because of the hefty deposits that are required and also the need to be able to bridge the difference between what they can borrow and the high house prices that they frequently face."

But gifted deposits can be tricky when it comes to areas such as who you're allowed to accept money from and the proof you need to give to your lender.

What's a gifted deposit?

A gifted deposit is when somebody - usually a family member - gives a homebuyer a sum of money towards their deposit, or gifts them the entire deposit.

The crucial thing is that it's a gift, with no agreement for the homebuyer to repay the money.

If a family member can help increase a deposit from 5% to 10%, or from 10% to 20%, this in turn opens up more mortgage deals to borrowers and allows them to reduce the amount they pay each month.

If parents are looking for a way to help their children get on the property ladder, a gifted deposit can be the simplest way.

Who can gift a deposit?

Some lenders stipulate who can gift a deposit. Immediate family - parents, siblings and grandparents - are usually permitted, but more distant family member such as aunts and uncles, or people who aren't related to you at all, may not be allowed.

Before your family gifts you money for your deposit, check with your mortgage adviser or lender to make sure that they're allowed.Buying a home infographic

Most lenders will not accept a gifted deposit if the person gifting it is the vendor - while this seems unlikely, it could be an issue if you're buying a property from your parents.

Mortgage criteria for gifted deposits

There are a few things to keep in mind if a gifted deposit is forming part of your house-buying. Each mortgage lender will have their own rules over gifted deposits, but these are some of the common clauses and exclusions.

Proof of gift

Your lender may want whoever is gifting you the money to prove that it's a gift, and that you're under no requirement to pay it back.

If you do have to pay it back, the lender will consider it a loan and may not allow it.

Alternatively, they might add the repayments to your monthly outgoings, which they then assess to determine whether you can afford the mortgage repayments.

This could impact your affordability and stop you from borrowing the amount you need. Borrowing money for a mortgage deposit is generally frowned upon by lenders for these reasons.

No right to the property

Where parents can't afford to give the cash away there could be alternatives such as acting as a guarantor to help them borrow more
David Hollingworth, London & Country

Your benefactor 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 may be asked to sign a declaration stating they relinquish any legal interest in the property.

Conveyancing and gifted deposit

Conveyancers have their own checks to make on the origins of a gifted deposit, as they have a duty to be vigilant about money laundering.

If there is a gifted deposit, a conveyancer will usually require confirmation of a few things. They'll need the details of the gift-giver(s); full names and ID, as well as evidence of where the money's coming from.

So if the funds are in savings in the gift-giver's bank account, they may ask for the bank account statement to show the money in the account. They may also ask for details about how the funds have been accumulated.

ID allows a conveyancer to do an anti-money laundering (AML) search. This checks the name, date of birth and document they're verifying.

Inheritance tax

If the person gifting you money passes away within seven years, inheritance tax may be payable on the gift. However, this will only apply if the person's estate (including the gift) is worth more than £325,000.

Alternatives to gifting a deposit

There are a few alternative ways parents can help their children get on the property ladder, and different ways borrowers can get their deposit together.Low-deposit mortgages

These include parents being named as a guarantor on a 100% mortgage, offsetting their savings, or even taking out a joint mortgage with their children.

If parents can't help, government schemes such as Help to Buy or shared ownership might also be options.

"The number of options for those with only 5-10% of a deposit to put down have expanded substantially since the credit crunch when availability dwindled to only a handful of 95% options," said Hollingworth.

"The Help to Buy guarantee has helped to boost options and that has allowed lenders to develop rates, whether backed by Help to Buy or not.

"More competition generally has helped to bring rates down and that has included the deals on offer to those with smaller deposits, not just those with bags of equity.

"Where parents can't afford to give the cash away there could be alternatives such as acting as a guarantor to help them borrow more.

"Alternatively, there are deals that enable the cash to be kept in the parental name and to be used as additional security for the mortgage, which enables a higher proportion of the purchase price to be borrowed."

Ultimately, if none of these options are open to you it may be a case of saving for your deposit and playing the waiting game.

Speak to a mortgage adviser

If you're unsure about whether you can use a gifted deposit, it might be worth speaking to a mortgage adviser.

You can speak to an adviser from London & Country for free on 0800-073-1959, or arrange a call back.[1]

They'll 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.

By Emily Bater