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Getting on the property ladder in the UK has never been more difficult. In fact, according to UK Finance and Which? it is predicted that mortgage lending will drop by £35bn in 2022. Mortgages enable many people who would otherwise never be able to purchase their own home to do so, provided they have enough capital to cover the initial deposit. Finding money for a deposit is particularly challenging for first-time buyers who are currently renting. Fortunately, friends and relatives can help them out by putting some or all of the money up themselves. This is known as a gifted deposit. But, how does a gifted deposit work, and does it affect the mortgage application process?find me a mortgage
Tax law in the UK means that giving another person money can be more complicated than many people realise. For example, while family members can freely give one another as much money as they like, the recipient will be liable for inheritance tax if the relative gifting the money dies within seven years. Tax law generally doesn't apply for relatively small sums, but mortgage deposits often run into the tens of thousands of pounds. So, it's important to understand exactly what a gifted deposit is.
A gifted deposit is any amount of money someone else gives you to pay your deposit, whether in full or only partially. Gifted deposits are not classed as loans, and the person giving the money does not have any stake in or special rights regarding the property. If the person offers the money on the understanding that the recipient will repay it later, it's considered a loan, not a gifted deposit.
So, how does a gifted deposit work in practice?
The key with a gifted deposit is it is exactly that, it is a gift and the money should not be repaid otherwise it breaches the agreement that has been signed. Legally, anyone can provide a gifted deposit. Most mortgage providers prefer that the money is gifted by a relative, and a few go even further, requiring the money is gifted by a parent. Every lender has its own policy for gifted deposits, so you should speak to them if you plan on using one. Generally, however, the broker, lender and a solicitor will need to see paperwork/evidence of the gifted deposit before proceeding.
Anyone providing a gifted deposit to someone else needs to prove that they can afford to give the recipient the required funds. They may also be required to prove the source of the money. If the money is coming from savings they have built up over time, evidence of their bank account history should be sufficient. If the money is coming from an inheritance, they may have to provide a copy of the deceased's will.
To give someone a gifted deposit, the person providing it cannot be considered to be 'depriving themselves of capital.' For example, if the person gifting the money would become eligible for certain state benefits after giving the gift, they may be prevented from doing so.
In terms of IHT, whether or not the gifted deposit is subject to IHT depends on the person gifting the deposit’s financial situation i.e. if they aren’t anywhere near the IHT threshold then IHT will not apply.
If you want to use a gifted deposit as part of a property purchase, you and the person gifting the money will need to provide the required paperwork to your lender. However, as long as everything is in order and there are no concerns about the documentation you submit, using a gifted deposit should not negatively affect your mortgage application in any way. In fact, it will only serve to increase your eligibility by enabling you to afford a larger deposit.
Using a gifted deposit can also save buyers money in the long run. Paying a higher deposit upfront should mean lenders offer a lower interest rate or more favourable payment terms. It may also reduce the time it takes to repay the mortgage.
However, some lenders are stricter than others in their requirements for who can provide a gifted deposit. Some mortgage providers will only accept gifted deposits from relatives. If you're relying on a friend or other non-relative to help you with paying your deposit, you should make this clear to prospective mortgage providers. There are other ways that relatives can help buyers with the costs of a house.
You should also always consider the inheritance tax implications of a gifted deposit, even if the person giving you the money is young and healthy.
If for whatever reason, a gifted deposit isn't a viable option, there might still be ways for friends and relatives to help buyers with their costs or eligibility for a mortgage. WIS Mortgages provides free advice for all types of buyers, and specialist advice for contractors. Contact us today to find out more about your mortgage options. We're an experienced mortgage broker in Kent, London, Essex, and Buckinghamshire, but we cover the whole of the UK and there are zero fees to pay. We also offer accountancy and insurance services via our sister companies, WIS Accountancy and WIS Business Protection.
Gifted deposits offer a valuable lifeline for many people looking to buy a home and can improve their mortgage eligibility considerably. Make sure to inform your mortgage provider as soon as possible if you plan on using a gifted deposit. WIS Mortgages can help you find the right mortgage for your circumstances.
As a mortgage is secured against your home/property it may be repossessed if you do not keep up with the mortgage repayments.Contact Us