If you are using a mortgage to buy your first home, a deposit is essential. This cash sum is usually a percentage of the property price and it’s money the buyer needs before exchange.
How much deposit is required depends on where in the UK the buyer is purchasing but using the Nationwide’s average house price of £269,426* as an example, a 5% deposit equates to £13,471 and 10% £26,942.
As a result, many first-time buyers seek help from family to raise a deposit. In fact, Uswitch found 37% of the UK's first-time buyers paid their deposit using a gifted deposit from their family.
More and more purchasers are coming to us mentioning gifted deposits, so we have pulled together the most commonly asked questions and supplied the answers below:
Q. Why is the highest value deposit important?
A. A buyer with a 10% deposit can generally access more attractive deals and lower mortgage rates than one with a 5% deposit. Additionally, a higher value deposit reduces the risk of negative equity – that’s when the mortgage debt is worth more than the property’s value.
Q. Can a relative loan me a deposit?
A. The answer lies with the mortgage lender. If a relative wants their money repaid, this is classed as a loan. Most mortgage lenders will not accept a loaned deposit.
Q. What is a gifted deposit?
A. A gifted deposit is a sum of money given to a buyer with an agreement that it doesn’t have to be paid back.
Q. Who can give a gifted deposit?
A. We know there are generous great aunts and supportive god parents out there but the first port of call has to be the mortgage lender. Some lenders will refuse a gifted deposit outright, while others will only accept a gifted deposit from a blood relative.
Q. Can my parents gift a deposit and be on my mortgage application?
A. If you’re boosting your borrowing power by applying for a mortgage with a family member, this will usually preclude them from gifting you a deposit. The same applies if someone who wants to gift a deposit also wants to be listed on the deeds. Why? A mortgage lender will usually insist that a gift giver must not have an interest or stake in the property being bought.
Q. Do I need a special letter?
A. A ‘gifted deposit letter’ may have been mentioned to you and this is almost always compulsory. This letter sets out the property value and address, the details of who is gifting the deposit and how much they are gifting, together with proof of funds, ID, a declaration that the money is a gift and not a loan and a statement that confirms the giver has no interest or stake in the property being purchased.
Q. Is there an upper limit on how much can be gifted?
A. No, a generous benefactor can gift as much as they are comfortable with, as long as they can prove they are financially solvent and have proof of funds. The answer to the next question will, however, be critical.
Q. Will I have to pay tax on the gift?
A. Potentially, so seek professional financial advice. Everyone has a tax-free allowance that allows them to gift money (£3,000 annually) but a buyer using a large gifted deposit may have to pay inheritance tax on the amount. This may occur if the donor dies within seven years of making the gift and/or their estate exceeds the inheritance tax threshold.
Q. Can a gifted deposit be protected?
A. Yes, a deed of trust can be drawn up by a conveyancing solicitor. This ensures if a property owned by a group of friends or with a partner is sold, the correct deposit contribution goes back to the beneficiary of the gifted deposit.
If you’re still left with any questions about gifted deposits, get in touch.
*December 2024
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