To buy a house, you’ll normally need around a 10% deposit for your mortgage. And with the average UK price sitting at £255,535, that means you’ll need to save around £25,500 for a deposit. Easier said than done!
Getting some help from your parents – some money towards that amount, or even the whole amount – can help you reach that 10% mark sooner. Here, we explain everything you need to know about gifted deposits.
What is a gifted deposit?
A gifted deposit is exactly what it sounds like – some or all of the money you need to put a deposit down on a property purchase, given to you as a gift.
That last part is crucial. A gifted deposit must be a gift with no strings attached. If you’re expected to pay back the money you’ve been given towards your deposit, it’s not a gift, it’s a loan (and this can affect your ability to get a mortgage – more on that below).
Gifted deposits are often given by family members – usually parents, but sometimes siblings or grandparents – and they’re an increasingly popular way of helping first-time buyers get on the property ladder.
And the gift doesn’t have to cover the entire deposit either. If your family member can help you increase your deposit from, say, 5% to 10%, this could open up more attractive mortgage deals while reducing the amount you need to pay each month.
Who can give you money for a gifted deposit?
Accepting a gifted deposit from your immediate family (parents, siblings, and grandparents) is usually a safe bet. However, more distant family members, such as aunts, uncles, cousins, or people not actually related to you by blood, may not be approved by many lenders.
It’s also worth bearing in mind that most lenders won’t accept a gifted deposit if the person or people giving it to you are also the vendors (sellers). It’s not a common scenario but, if you’re buying a property from your parents and they’re helping you fund it with what is basically a price reduction on the property, it could make it harder to get a mortgage.
Before you accept your family member’s kind offer of a gifted deposit, check with a mortgage advisor to make sure it’s likely to be accepted by a lender.
What are the rules around using a gifted deposit to buy a house?
Every mortgage lender is different and they all have their own criteria around gifted deposits. But they mostly agree on the following two rules:
- You must be able to prove it’s a gift (and not a loan).
- You must guarantee the gifter has no legal right to the property.
1. You must provide proof your deposit is a gift
Before accepting a gifted deposit, your lender will want the gifter to declare in writing that it’s a gift with no obligation for repayment.
If you do have to pay it back, the lender will consider it a loan, and one of two things will happen:
- They refuse to accept it.
- They add it to your monthly outgoings as additional borrowing, which they then assess to figure out whether you can afford the mortgage repayments.
The latter could affect your affordability (your lender’s message of how much mortgage you can afford) and prevent you from borrowing the amount you need to complete the purchase.
How do you prove it’s a gift and not a loan?
You’ll need a Gifted Deposit Letter. Some larger banks and mortgage lenders will supply you with a form to fill in, while smaller lenders may insist on a lawyer’s letter.
This letter must include:
- The gifter’s name
- Your name
- The amount of money given
- The source of the money
- The relationship between the person gifting and receiving
- Confirmation that it’s a gift with no expectation of repayment
- Evidence the person gifting the money is financially solvent
You and the gifter will need to sign this letter to confirm the details are correct, and you’ll need to have it signed by a witness too.
In addition to this particular piece of paperwork, the person providing the gift will need to prove they actually have the money to gift you. This means they’ll need to gather their most recent bank statements and evidence of the source of the money (like payslips, or a will if it’s a lump sum from an inheritance). This step is crucial for the anti-money laundering checks carried out by your lender and conveyancer.
Finally, the person providing the gift also needs to provide a valid photo ID (such as a passport or driving licence) and two proofs of address (like a council tax bill, utility bill, or bank statement).
2. You must guarantee the gifter has no right to the property
The gifter may be asked on the gift deposit letter whether they expect to have any interest or equity in the property you’re buying. They may also be asked if they expect to have the right to live in it after you’ve bought it.
If this isn’t included on the form, your lender may ask you to provide a separate signed letter. This letter should state that the person giving you the gift has no legal interest in your property.
How big can gifted deposits be?
Generally speaking, there’s no limit on how large a gifted deposit can be. However, some lenders may only be willing to accept a gifted deposit up to a certain percentage of the property’s value. That’s because they may view it as risky if the buyer isn’t putting any of their own money into the deposit.
When accepting a sizeable gifted deposit, the other thing to keep in mind is inheritance tax (IHT).
What are the rules on gifted deposits and inheritance tax?
Every UK taxpayer can gift up to £3,000 a year, completely exempt from inheritance tax – the tax on the estate (the property, money and possessions) of someone who’s died.
You can carry over any unused inheritance tax allowance from the previous year. That means if your family member didn’t gift anyone anything last year, they could, in theory, give you £6,000 this year without any inheritance tax consequences.
But if the amount they give you exceeds their inheritance tax allowance, it could be liable for inheritance tax. This is because if the person gifting you the money passes away within seven years of the gift, it would still be classed as part of their estate.
Inheritance tax only applies if the person’s total estate (including the gift) is worth more than £325,000.
Alternatives to using a gifted deposit
There are a few ways your parents can help you get on the property ladder without gifting you a deposit. These include having your parent named as a guarantor on your mortgage (meaning they would be liable for payments should you fall behind) or taking out a joint mortgage with your parent, where you would both be responsible for the repayment of the loan.
Read more about guarantor and joint mortgages here.
Meanwhile, if your parents can’t help, you could look at government schemes like shared ownership or Help to Buy, which often require a much smaller deposit (usually 5%) for first-time buyers.
Have you received or been offered a gifted deposit?
Not sure about the next steps? Habito’s friendly team of mortgage brokers are on hand to help you understand your mortgage options with a gifted deposit.
Get started here. It’s totally free!