As property prices continue to increase, many prospective homeowners face the difficult task of saving for a deposit.
First-time buyers, especially those who are renting, may struggle to save up for a deposit. To overcome this many may rely on financial assistance from family members. One popular way of providing this help is with the use of a gifted deposit.
What is a gifted deposit?
This type of deposit is a sum of money given to a homebuyer, usually by a family member, to be used as part of the deposit for buying a property. Unlike with a loan, a gifted deposit is made on the basis it does not need to be repaid.
If you need to repay the gifted money, it will be considered a loan by the mortgage lender. This will impact their assessment of how much you can afford for your mortgage and may result in them refusing to lend.
Using gifted money has become more popular in recent years, especially among first-time buyers who may struggle to save enough money for a deposit on a home. According to a study by Legal & General in 2023, 47% of homes bought by homebuyers under the age of 55 in 2023, were purchased with financial help from families.
Why gifted deposits are popular
Several reasons explain why these deposits have become so popular with homebuyers:
- Rising property prices: The UK housing market has continued to experience considerable price increases in recent years. In cities like London, property prices have reached levels that are often out of reach for many buyers.
- Improved mortgage terms: If you have a larger deposit, this often opens options for better mortgage rates.
- Ability to get on the property ladder faster: saving for a down payment can be a lengthy process. By having the option to use gifted funds, buyers are able to get on the property ladder sooner.
- Potential for financial flexibility: Even if you have money saved for a deposit, a gifted deposit could help to free up your savings. This will allow you to use the money you have saved for other expenses such as home improvements or moving costs.
How do they work?
Key Considerations
When using a gifted deposit to purchase a home, there are several important things to keep in mind:
Where the money is coming from: Lenders will require proof that the gifted deposit funds come from a legitimate and legal source. This is to make sure they are complying with anti-money laundering regulations.
Documentation: Proper documentation is essential when receiving a gifted deposit. The person making the deposit needs to sign a declaration letter. The letter confirms that the deposit is a gift, not a loan and they have no financial stake in the property.
You may need to do this more than once if you use a mortgage broker, as they may need their own proof along with your lender.
Inheritance Tax: In the UK, inheritance tax (IHT) may apply to gifted deposits if the donor passes away within seven years of making the gift. It is a good idea to speak to a financial adviser to understand what may happen if you find yourself in a position where the money you were gifted is going to be subject to inheritance tax.
Lender Requirements: Different lenders may have varying policies regarding gifted deposits. Make sure you check with your mortgage advisor or lender about what requirements they have.
Size of deposit allowed: Most mortgage lenders accept gifted deposits of any size.
The gifted deposit letter
The gifted deposit letter is a formal statement from the person gifting the money and must include certain information to meet the lender’s requirements. The letter should contain:
- Donor’s full name and address: The letter should clearly state the donor’s full name and address. Both account holders need to be included if funds are coming from a joint account.
- Recipient’s full name and address: The letter should identify the person receiving the gifted deposit. including their full name and address.
- Amount of gifted deposit: The letter should state the exact amount being gifted.
- Relationship to the Buyer: The donor’s relationship to the buyer should be clearly stated, such as a parent, grandparent, sibling, or other family member.
- Declaration of gift: The letter must state that the money is a gift, not a loan, and that there is no repayment required or expectation of part ownership of the property.
- Date and signature: The letter should include the date and the donor’s signature.
Rules and regulations for gifted deposits
Most UK lenders accept gifted deposits, but there are rules that need to be followed.
Anti-money laundering regulations: Lenders must follow strict rules to prevent money laundering. This includes confirming the source of any gifted deposit funds. This process includes:
Proof of identity: The donor will need to confirm their identity by providing valid identification documents, such as a passport or driver’s license.
Proof of funds: Evidence of where the gifted funds are coming from and how they have been attained, such as bank or savings account statements will need to be provided.
Who Can Gift a Deposit?
Direct family members, including parents, grandparents, or siblings, most commonly provide gifted deposits. Some lenders may allow gifted deposits from distant relatives or friends. It is a good idea to ask your lender what their policies are on gifted deposits before you proceed.
If you have more questions about buying a property with a gifted deposit, feel free to contact our friendly team.
