In this article, we’ll be looking into one of the specific options available (usually) to parents and close relatives to help their children raise the funds required for a deposit when purchasing a home, namely gifted deposits.
Gifted deposits are especially relevant to first-time buyers, given that the sums required to complete a purchase on a property with the help of a typical mortgage are out of reach for many of the UK’s potential homeowners.
For many first-time buyers, a 10% deposit on the property is an assumed requirement from mortgage lenders (though, at the time of writing, increasingly higher loan to value rates (LTVs) do mean some first-time buyers may be able to complete a property purchase with a smaller deposit amount).
In fact, the latest data from the UK’s House Price Index reports that the average house price in Britain, as of December 2020, stands at £251,500, which equates to a £25,150 deposit (based on a typical first-time buyer 90% LTV mortgage).
Even with the most rigorous saving regimes, these sorts of deposits are clearly out of reach for a large number of first-time buyers, and this is where gifted deposits can offer a solution to help achieve that challenging first step onto the property ladder.
So what is a gifted deposit? A gifted deposit is when an individual – usually a family member – gives a homebuyer a contribution towards their deposit (often referred to as ‘the bank of mum and dad’). This could be a percentage of the overall deposit required or it could be for the full amount – the point being that it is considered a gift intended to help the buyer. The individuals gifting the money will also have no stake in the property in return for gifting the money.
By way of example, if mum and dad want equity in the property in exchange for the money (part ownership), or they want their money back at some point (a loan), this isn’t a solution and the buyer should speak with their conveyancer about the steps that need to be taken).
For the absolute avoidance of doubt, the emphasis is on the word ‘gifted’ because the money is given without the expectation of it being paid back as you would with a loan.
Gifted deposits: What are the benefits?
The simplest benefit is having the money necessary to buy a house without the need to save for it. It’s also tax-free (see below for more information on this).
But in real terms, the bigger your deposit towards the overall purchase price, the more diverse the range of mortgage products and offers available. And this can mean saving literally thousands over the lifetime of your mortgage.
As a quick illustration*, if you bought a £251,000 property at the time of writing (April 2021) with a 25% deposit, you could expect an interest rate of around 1.24%, so you could be paying £9,826 in year 1. (*Source: moneysavingexpert.com)
In contrast, buy the same property with a 10% deposit, and you’d see an interest rate at around 2.35%, costing £12,684 in the first year – that’s an increase of £2,858.
Assuming the product, interest rates and repayments remained the same for the full term of the mortgage, over 25 years that represents a saving of £71,450.
It’s quite apparent therefore that there’s a viable financial reason for putting down a larger deposit if you (or more specifically the person giving the gift) can afford to.
Who can gift a deposit for a mortgage?
Essentially anyone can make a gift to a property purchase, but in the vast majority of cases, it’s immediate family members (parents or grandparents) that gift money towards a deposit. Though it is possible, buyers should be aware that lenders are more cautious of more distant relatives such as aunts and uncles or even friends, with legitimacy and money laundering checks being in place to ensure everything is above board.
How does a gifted deposit work?
The process of gifting the money is the same as any other financial transaction, thought the individuals gifting the money will need to provide evidence of the source of their funds as well as make them available and ready for your conveyancer at the point of exchange of contracts, when deposits are secured, and the property transaction becomes legally binding.
As mentioned above, money laundering is a big risk in property purchases, especially when money is passed between individuals not directly tied to the property transaction.
As such, if you are receiving a gifted deposit for your purchase, you should inform your conveyancing solicitor as well as mortgage lender as soon as possible to allow them time to conduct the relevant anti-money laundering checks.
Gifted Deposits: What you’ll need to provide to your mortgage lender and Conveyancer
• Gifted deposit letter to your mortgage lender
First of all, you will need to provide a ‘gifted deposit’ letter to your lender. This is your proof that your deposit is a gift and not a loan and is signed by the person giving you the money.
Typically, mortgage lenders have a template that they will provide you with. The letter is essentially a means for lenders to mitigate the risk of the donor claiming the money was a loan and not a gift at a later date and so it’s in their interests to get the wording concise and legally accurate.
A typical gifted deposit letter will contain the following details:
• The name of the person receiving the gift
• The relationship between you both
• The sum of the gift
• Confirmation there is no expectation of repayment
• Confirmation there is no requirement for the donor to receive any stake in the property
• Confirmation that the person gifting the deposit is financially solvent – effectively ensuring that the money will be available when required to complete the purchase of the property.
Furthermore, the letter should be signed and dated by the person gifting the deposit and also signed by a witness.
• Proof of identity documents to your lender and conveyancer
In addition to the gifted deposit letter, the person that is gifting you the mortgage deposit will need to provide the mortgage lender with documents confirming their identity. These will be confirmed by the lender, but typically they are as follows:
• Photo ID
• Proof of address
• Bank statements
It is necessary to supply these documents to comply with anti-money laundering regulations. Your conveyancing solicitor will also request similar documents for the same purpose.
• Proof of funds to your conveyancer
Your conveyancer is legally obliged to confirm the source of the gifted funds. More often than not this is fairly straightforward with proof from the likes of bank statements, but in instances where the money originates from other sources (such as some overseas banks, companies or cash deposits) the process can become much more complex.
• Gifted Deposits: Consider A ‘Deed of Trust’
If entering the house buying process with a partner whether as friends or a couple, it is worth considering having your conveyancer draw up a ‘Deed of Trust’.
If friends or couples are buying a property together, the reality is that sometimes relationships don’t work out, or one of you could pass away unexpectantly. A deed of trust will state how the equity in the house is divided if things don’t work out as planned.
This is particularly relevant for gifted deposits, as in the event of a gifted deposit coming from one party’s family, the deed could outline that the deposit amount from the sale is returned to the person whose family gifted the money before any further equity is divided by both parties.
Do you have to pay tax on gifted deposits?
Essentially, no. Gifted deposits are tax free.
If the money is gifted from your immediate family, it will be classed as a Potentially Exempt Transfer. This means you don’t need to declare it as income, and therefore would not attract the usual taxes, and, as long as the donor doesn’t die within seven years of donating the funds, it will not be subject to inheritance tax (IHT).
Alternatives to a gifted deposit
While a gifted deposit can make for a very attractive proposition for first-time buyers, it’s not always an option – not all families can or will part with the sort of money required to put a deposit down on even a modest house.
However, there are a few schemes available that can help first-time buyers get onto the property ladder if gifted deposits aren’t an available option:
There are always changes in the mortgage market to keep an eye on in addition to these schemes, and it’s worth checking to see when new products become available.
With the Covid-19 pandemic, there has been a big change in the way first-time buyers and mortgage companies work together, and with first-time buyers representing a huge element of the UK property market, it’s in everyone’s interest to ensure they have as much help as possible in securing their first home.
Here at Enact, we can help you with all of your conveyancing needs for your property move. Just click to link here for your free instant online conveyancing quote.