Gifted deposits

With house prices rocketing in recent years and the unprecedented rise in the cost of living, aspiring first-time homebuyers are finding it harder than ever to get onto the first step of the property ladder.

According to new research by Nationwide Building Society, 28% of people say that saving up a substantial enough deposit to put down on their first home is the biggest hurdle to overcome in their bid to become homeowners.

That’s hardly surprising when figures from the Office of National Statistics show that the average UK house price currently stands at £278,000. For this, buyers would need to save up almost £14,000 to meet the minimum 5% deposit requirement most lenders require.

Thankfully for some, here’s where the bank of mum and dad (or similar) can step in to help.

A gifted deposit like this can make the difference between getting accepted or rejected for a mortgage.

But there are some steps you need to take before you can use one to buy a home.

What is a gifted deposit?

It’s a sum of money given as a gift to a homebuyer to pay for some or all of the deposit on a property.

In most cases, it will be a close relative like the parents or grandparents of the homebuyer who provides the gifted deposit. The money might be from savings, or perhaps from equity they’ve released from their home.

The key thing is that the money is a gift, not a loan to be repaid, and that the gift-giver has no subsequent legal claim on the property. This is something that the mortgage lender will need to be satisfied is the case.

How do gifted deposits work?

Most mortgage lenders ask for a minimum 5% deposit to secure a mortgage.

Many first-time buyers struggle to save up this amount. And this is where a gifted deposit can step in. A cash sum - from perhaps a close relative or friend - can either pay for the whole of the deposit or make up a shortfall. It can mean the difference between securing a mortgage or not.

A cash gift could also increase a deposit from 5% to 10%, or from 10% to 20%, for example. A larger deposit will open up more mortgage deals to the borrowers - and often more competitive rates. That means the amount you pay each month and overall is less than it would have been with a smaller deposit.

You’ll need to tell your lender and your conveyancing solicitor that the deposit is a gift.

Failing to do so could mean that there’ll be a delay in your mortgage offer, or a withdrawal of the offer. So be upfront. Talk to your mortgage lender and solicitor to see what they require.

What is a gifted deposit letter?

Depending on the size of the gifted deposit and when it was given, you may have to take steps to prove to your lender that it is a gift (rather than a loan) and that the money will not need to be repaid.

Most lenders and conveyancers will have a template gifted deposit letter you can download for the donor/s to fill in and sign to verify this.

On the form or letter the donor/s must provide their personal details such as name and address and their relationship to the mortgage applicant. They’ll also need to confirm the amount and verify that the money is an unconditional and non-refundable gift and that they have no rights or interest in the property.

As part of standard anti-money laundering procedures, the donor will also need to provide bank statements or similar proof to your conveyancing solicitor showing exactly where the money they’re gifting has come from.

They’ll also need to provide your solicitor with proof of ID (passport or driving licence), plus proof of address (such as a bank statement or utility bill).

Who can gift a deposit for a mortgage?

Most mortgage lenders are happy to accept gifted deposits but prefer them to be from immediate family members, such as parents, grandparents or siblings.

Some may be more cautious when the gift is from a friend, for example, because they see it as more of a risk or they may have concerns that the gift might in reality be a loan.

Whatever the case, they’ll usually require signed confirmation that there’s no requirement for the money to be paid back and that the donor has no legal claim on the property.

Before anyone gifts you money for your deposit, check with your mortgage adviser or lender to make sure that it’s allowed.

Can I use a gifted deposit as a first-time buyer?

Yes, a sizeable proportion of first-time buyers have managed to get their first step on the property ladder thanks to a gifted deposit.

Mortgage criteria for a gifted deposit

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, so it’s always best to check ahead before you make a mortgage application.

Most lenders will require:

• A signed letter from the donor confirming that the gift is not repayable and that they relinquish any legal interest in the property
• If the gift is repayable, then the lender will consider it a loan, and may not offer you a mortgage on that basis. However, if they do allow it, they’ll want to see details of how you will repay it. This will then be taken into account in their affordability calculations to determine how likely it is you’ll be able to afford your mortgage repayments

Are there any tax implications?

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.

Is there a limit on how much can be gifted?

Most lenders don’t impose upper limits on the amount that can be gifted for a deposit. But it’s wise to check with your preferred lenders before you apply for a mortgage with them.

Alternatives to gifted deposits

There are a few alternative ways parents can help their children get on the property ladder, such as:

• Being named as a guarantor on the mortgage. This means that your parents guarantee to cover the mortgage payments should you be unable to. They may need to use their own property as security, or their savings, so it’s a big commitment and one that should only be made after taking independent financial advice
• Taking out a joint mortgage with you

There are also government schemes that might help, including:

• The Help to Buy: Equity Loan scheme, which offers first-time buyers the chance to buy a new-build home with a 5% deposit, plus an equity loan of up to 20% of the purchase price, interest-free for five years
• Shared ownership, an initiative that allows people to buy a share of a home (between 25%- 75%) from a housing association. You then pay a subsidised rent to the association on the remainder. You can increase your share of the property over time by buying it from the housing association in a process called ‘staircasing’ - and eventually own 100% of it. Specific rules will apply and you may have to meet certain criteria when increasing your share in the property.
• The First Homes scheme offers key workers and local first-time buyers a 30-50% discount on the market price of new builds
• A Lifetime ISA, designed to help you buy a first home costing up to a maximum £450,000. You can save up to £4,000 per annum and the government will add 25% on top