What is a Gifted Deposit?

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Buying property in the current market is a double-edged sword. On the one hand, property prices have skyrocketed. On the other hand, lenders have tightened their requirements to minimise risk, making the prospect of buying a home feel unachievable, especially when you have to save a sufficient deposit.

However, some potential homeowners are lucky to have a ‘helping hand’ in the form of a gifted deposit that makes it easier to purchase the property.

If you’re considering a gifted deposit or gifting a deposit to a loved one or family member, it’s important to know how this will affect the mortgage process. This guide should help you understand gifted deposits and how to navigate them.

What is a Gifted Deposit?

A gifted deposit is a sum of money given to a homebuyer, usually by a family member, to put towards a deposit on a property they’re interested in.

What makes gifted deposits different is that they must be a gift rather than a loan. Lenders need to distinguish between the two clearly. If you get a gift deposit, you must sign a declaration form confirming that there’s no stipulation for the receiver to pay you back.

Some mortgage providers are happy to accept loaned deposits if you agree to repay the sum before you sell the property. However, the sum will be considered a financial commitment and factored into affordability calculations, which will impact your borrowing options.

Ways of Gifting a Deposit

There are several ways you can receive a gift deposit. The most common one is a bank transfer of funds from the gifter’s savings or current account to your account.

Alternatively, you can consider withdrawing funds from your pension or releasing equity from your own home. However, you should be aware that these options could have significant implications for your future, so you should seek financial advice before going down this route.

Besides gifting a deposit, there are other ways you can help a loved one purchase a property or a home, such as guarantor mortgages, joint mortgages, and family offset mortgages.

What is a Gifted Deposit Letter?

A gift deposit letter is a document you need to confirm that the money is, in fact, a gift. It is not enough to simply email or type a statement saying that the sum has been given to you as a gift. It should have a sign among other elements as highlighted before:

• Who – The letter should state the full names of the donor and the recipient. It should also highlight the relationship between the donor and the recipient and the purpose of the gift.
• Gift amount: The letter should declare the exact amount of the gift, including any money gifted towards the purchase costs of the property.
• Reason for the gift: Explain why the money is being gifted. The most common reason is love and affection, which are common when parents help their children buy their first home.
• Non-repayable gift: The letter should also clearly state that the money is a non-repayable gift to ensure that it cannot be claimed back in the future.
• Solvency declaration: The letter should also detail that the donor is financially solvent to prevent potential legal complications if bankruptcy occurs within five years of the gift.
• Independent legal advice: Another important element is that the letter should acknowledge that the recipient and donor do not share the same solicitor and that independent legal and financial advice has been sought.

The recipient and the donor should sign the letter in front of the witness, who should also sign the letter. Witnesses should not be family members or anyone who benefits from the transaction.

This letter is a crucial part of the mortgage application process. It allows lenders to ensure the buyer’s deposit is not an additional loan and also helps assess the buyer’s financial situation accurately when determining mortgage eligibility.

Who Can Give a Gifted Deposit?

Most gifted deposits are from parents. Research conducted in 2020 found that over £500m was gifted by over 55s during that year alone.

Most first-time buyers turn to their parents for financial support when purchasing a home. But parents are not the only suitable candidates who can gift deposits.

Family-gifted deposits

Parents are usually permitted to gift their child a deposit without question. However, other close relatives, including siblings, grandparents, and partners, can also gift a deposit to the buyer, and this is accepted by mortgage providers.

On the other hand, more distant relatives, such as great aunts, uncles, or cousins, may not be eligible. However, this depends on the lender. Some won’t allow gifted deposits from anyone outside the immediate family, whereas others might be more lenient but require that the person gifting the funds be a blood relative.

Friend-gifted deposits

Typically, lenders are more wary about accepting gifted deposits from friends. Reasons for this include difficulties identifying the source of funds and the risk of someone outside the family claiming the property later on.

If you’re thinking of applying for a mortgage using a friend-gifted deposit, your choice of lenders will be significantly smaller. However, an increased downpayment could give you more competitive rates, so you should speak to a broker to better weigh your options.

Gifted equity deposits (Concessionary purchases)

A gifted equity deposit or concessionary purchase is when a company or individual offers to sell you a property at a discounted rate from the true market value.

Some mortgage providers may consider this form of deposit, and many will consider the property’s value to match the agreed purchase price. That means you will be required to make your deposit contribution anyway.

There are several types of concessionary purchase types to be aware of. Some are more common and widely accepted than others.

Concessionary family-gifted deposit

This concessionary applies when a family member offers to sell you their property at a discounted rate, usually far below its true market value, as an alternative to your contributing cash.

Family-gifted equity is pretty common. The arrangement is easy to prove legitimate and considered fairly low risk. Lenders are usually quite comfortable with it, making up 100% of the deposit.

Builder-gifted deposits

Builder or developer-gifted deposits refer to when a building developer offers to sell you a property at a discount from the original asking price. They are commonly used as selling incentives, particularly for new property.

Several lenders are happy to consider builder-gifted deposits, but you may have to contribute some of your cash on top, as new-build deposits are slightly higher than average.

Vendor-gifted deposits

With vendor-gifted deposits, the seller offers to sell you a property at a discounted purchase price. The discount you get can theoretically be used as a deposit.

Vendor-gifted deposits are not quite common anymore, and lenders are overly cautious about accepting them. If they do, they may question whether the original market price reflects the market value and may require you to add your own cash to the deposit.

How Gifted Deposits Work

A gifted deposit is not as simple as transferring money from one person to another. There are several steps and rules that you must follow, such as:

• You will need to write a letter with the proper formatting confirming the money is a gift that does not need to be paid back. This is called the gifted deposit letter.
• The giver must provide certain documents, such as a photo ID and two different proofs of address.
• Your solicitor will need to know where the funds originated to ensure they meet the anti-money laundering regulations.

Closing Remarks

If you’re struggling to save up the deposit for your first home, a gifted deposit is an alternative that can make the home purchase process easier and more manageable. However, you have to be aware of the legal requirements to keep the gift from affecting your mortgage application.