Saving a deposit to buy your first home is one of the biggest obstacles in your way to becoming a homeowner. More and more first-time buyers are looking to family members to help them get a foot on the property ladder and one way is with a gifted deposit.
What is a gifted deposit?
A gifted deposit is a sum of money given to you specifically to buy a property. The amount gifted to you can either cover the whole deposit or part of it. The key point is that the money must be given to you as a gift rather than a loan. This means that the person who gives it to you doesn’t expect to be repaid and understands that they will have no legal rights over your property.
Who can provide you with a gifted deposit?
Gifted deposits can be provided by a family member, friend or partner, depending on the lender’s stipulations. Many lenders prefer a gifted deposit to be given by an immediate family member, such as a parent, sibling or grandparent. Some may insist that it is only provided by a parent while other lenders may not accept gifted deposits at all. Most lenders don’t accept deposits that have been gifted by the seller — this means that if you’re buying the property from your parents, it’s unlikely that a lender will allow you to use a deposit that has been gifted by them. When applying for your Welling or Pimlico mortgage, ask your broker to check which lenders accepted gifted deposits and what their restrictions are.
Rules relating to gifted deposits
You must make both your lender and your solicitor aware that you are using a gifted deposit. This is because they have to carry out anti-laundering checks. There are various stipulations that need to be met when using a gifted deposit, which we’ve detailed below.
As mentioned earlier, this type of deposit must be classed as a gift, not a loan. A loan would impact your affordability for the mortgage loan as far as the lender is concerned. This means the lender may either reduce the amount offered to you or refuse your application altogether.
The person gifting the deposit has no legal charge over the property
When gifting a deposit, the person doing so must be fully aware that they will have no legal rights when it comes to your property. The lender may require them to sign a declaration confirming this.
Provide proof that it’s a gift
The person who gifts you the money for your deposit will need to sign a letter to this effect. This needs to contain the following information:
- Their relationship to you
- The amount being gifted
- The source of the money
- Confirmation that it’s a gift rather than a loan that has to be repaid
- Confirmation that they understand they have no claim over your property
A declaration form is often provided by the lender but, if not, a signed and certified letter is acceptable. Speak with your broker in Kent, London or Edinburgh for help with the exact wording required for a gifted deposit letter if this is the case. The person gifting you the money also needs to provide photo ID, proof of their address and proof of how the funds have accumulated, such as copies of bank statements.
There are no limits as to how much you can be gifted as a deposit but you should be aware of the rules for inheritance tax. The person gifting you the money has an annual tax-free gift allowance of up to £3,000 and they can carry this allowance over from the previous year. This means that if they haven’t already used this allowance, they can give you £6,000 without the funds being affected by inheritance tax. However, if they give you more than this, the money may be subject to inheritance tax should they die within 7 years of giving you the funds. The money then becomes part of their estate and if the estate’s total is above £325,000, up to 40% tax becomes due on the amount over this limit.
Adding to your gifted deposit
The more deposit you can pay, the less you need to borrow from the lender and the cheaper your repayments will be. Adding your own savings to the gifted deposit may also push you into the next borrowing threshold, meaning you’ll benefit from better rates.
For example, your relative may have gifted you a 10% deposit to buy a property in Bexleyheath. On its own, you’d need to borrow 90% of the property’s value and pay the rates at that loan-to-value (LTV) ratio. However, you may also have saved enough for a 5% deposit. Added together, you can apply for a lower 85% LTV mortgage instead of one at 90%. This lower threshold means you will be offered more competitive rates by the lender and possibly have access to more deals.
Alternatives to consider
If being gifted a deposit isn’t an option, there are other ways that family members can help you get a foot on the property ladder:
- A joint mortgage. This allows you to take out a mortgage with your family member. You’re both named on the property deeds and are jointly liable for the mortgage repayments. As your combined incomes are taken into account, you can apply for a bigger loan. The downside to this option is that if your family member is already a homeowner, an extra 3% stamp duty charge will be added as the new property will count as their second home.
- A joint borrower sole proprietor (JBSP) mortgage. A JBSP mortgage allows you to have a mortgage with your family member while being the only one named on the property deeds. You are both liable for the mortgage repayments but because your relative isn’t named on the deeds, no extra stamp duty is charged.
- A guarantor mortgage. With this type of mortgage, a family member or friend guarantees the mortgage payments if you are unable to make them. Some lenders agree to 100% guarantor mortgages and this type of mortgage is also helpful if you’re facing other obstacles when trying to obtain a mortgage, such as having a bad credit rating or being self-employed.
- A family springboard mortgage. Your family member deposits a sum, usually 10% of the property’s value, into an account that’s linked to your mortgage. This effectively counts as the deposit if you haven’t been able to save one yourself. The funds are held in the account for a set term and your relative will earn interest on them during that time. If you miss any repayments, your relative’s savings may be held for longer.
- A Lifetime ISA (LISA). You can save for your deposit without being taxed on the interest earned with this type of account. The government also pays an annual tax-free bonus on your savings.
You can also take advantage of these government schemes if you have managed to save a small deposit:
- The 95% mortgage guarantee scheme. This scheme allows you to buy a property with a 5% deposit and a repayment mortgage, assuming you pass the lender’s affordability checks. Lenders are encouraged to offer this type of mortgage as the government has agreed to cover any outstanding loans should buyers default on their repayments.
Help to Buy schemes. As a first-time buyer, the Help to Buy: Equity Loan scheme enables you to purchase a newly built property with a 5% deposit. You can borrow an equity loan of up to 20% of the property’s value or up to 40% if the property is in London. With the Help to Buy: Shared Ownership scheme, you buy a percentage of the property – between 25% and 75% of its value – using a deposit and mortgage while paying rent at a discounted rate on the remaining percentage.