Gifting money for a house deposit has become more popular in recent years, with the Bank of Mum and Dad (BOMAD)
and grandparents offering help to younger family members buy their first homes.
Whilst there are other ways to support first time buyers, like getting a joint mortgage, one of the most popular options is gifting or loaning the money
However, it’s not as simple as the parent transferring the money into the child’s account and saying it’s a gift. To follow anti-money laundering protocols, as well as checking the first time buyer can actually afford the property, it’s a little more complicated.
What is a gifted deposit?
The first thing to confirm is that the money is a gift, not a loan
. If the money is a gift, it means the parents or gifters have no intention of owning part of the property. It is given freely without expectation of payment in return.
If it’s a loan, there is expectation of repayment, whether that’s on a monthly repayment basis or when the property is sold down the line. This could make it less likely that the mortgage lender will offer you a mortgage, because they won’t want you having multiple loans on the same property. If you were unable to pay back the mortgage, your family member might have some kind of legal right over the property, which damages the security of the mortgage.
What is a gifted deposit letter?
In order to confirm that the money is a gift, the parents or gifters will need to sign a Gifted Deposit Letter
It is not enough to simply email or type out a simple statement saying that the sum is being given to the child and that is a gift.
You need to include:
- The name of the person receiving the gift
- The sum of the loan
- That it is a gift with no expectation of repayment
- The gift is motivated by love rather than commercial interest
- That the gift does not give the person giving it any stake in the property and will not affect the security of the mortgage lender
- That you are financially solvent.
The letter will need to be signed and dated by the gift giver and signed by a witness. It should be sent to the conveyancing solicitor and considered a legal statement. There may also be a specific form to be filled out from the lender to confirm the gift.
Who can give a gifted deposit?
Lenders are usually satisfied with a gifted deposit from a direct family member but are more concerned when it comes to third parties, like friends. This could slow down the process as the relationship is more complicated.
What does this mean for my mortgage?
Using a gifted deposit should not make a difference to what kind of mortgage you are eligible for, you just need to be clear with the lender from the outset that you are using a gifted deposit.
Can I still use my own savings too?
Receiving a gift can make up all or part of the deposit. You can use the gifted money alongside your own savings to increase your deposit amount. You still have to supply a letter, but there is no reason to discount your own savings, as having a higher deposit overall may get you a better mortgage deal.
What do I need to do?
Gifted deposit letter
The gifter needs to type up the deposit letter and sign it in front of a witness. You can discuss this with your conveyancing
Proof of funds
When the amount of money comes from expected sources (the sale of a large asset like a home, draw down of pension, equity release or sale of shares) these are easy to prove. If the money has been gradually saved up, multiple bank statements may be necessary to explain to solicitors and meet the anti-money laundering checks.
Proof of ID
The person gifting the money needs to show Photo ID (Passport/driving licence) along with 2 forms of proof of address. These could be bank statements, utility bills etc.
What are the risks?
If the person gifting the deposit dies within 7 years, you may be liable to pay inheritance tax. This depends on how large their estate is – if it is worth over £325,000 (including the gifted deposit) you may have to pay inheritance tax.
Inheritance tax can be more complicated, so it’s worth discussing with a financial advisor if you intend to gift a large amount as a deposit.
It’s been long accepted that a gifted deposit is used by the majority of first time buyers – with the high cost of living and rent, compared to the high cost of housing, it makes sense that parents and relatives would offer to help out. Some research shows that even second time buyers are using gifted deposits to scale up when trying to buy their next home.
Using a gifted deposit will not make getting a mortgage more difficult – just be sure to make sure your gifted deposit letter follows all the rules, and check with your conveyancing solicitor
if you are concerned.