Gifted deposits – How do they work?
Most mortgage lenders may not treat all types of gifted mortgage deposits equally. However, it is possible to get a great deal on gifted mortgage deposits.
Some mortgage deposits may be more favourable than others depending on who gifted them the funds and what circumstances they were placed under.
This guide will help you understand all about a family member gifting a deposit for a mortgage. Continue reading to find out more about how gifted deposits can be used to get a mortgage.
What is a gifted mortgage deposit and how do you define it?
Gifted mortgage deposits are a lump sum of equity or money that you receive from a family member to help you pay down a deposit on a property that you want to buy. The person gifting the deposit doesn’t expect it to be returned.
Mortgages with a gifted deposit are becoming more popular among homebuyers to increase their ability to purchase a property. It can also be a great way for them to get access to better deals and lower mortgage repayments.
If you have a 15% down payment and get a 10% mortgage deposit gift, you will now be in the desirable 25% bracket. This will reduce your monthly payments by borrowing less. It can also open up opportunities to get better rates from a wider range of mortgage lenders.
There are many types of gifted mortgage deposits, including…
- Family gifts
- Gifts from friends
- Vendor gifted deposits
- Builder gifted deposits
- Landlord gifted deposits
Each of these deposit types will be covered in more detail in the article. However, not all mortgage lenders are happy with the above. People with gifted deposits often use a mortgage broker to match them with the best mortgage lender based on their deposit type.
Evidencing a gifted deposit
One of the most important things you need to know in order to get approved for a mortgage using a gifted deposit is that the funds in a savings account are not loans. Both parties will need to sign a gifted deposit letter and documentation confirming the fact. This includes the name of the donor, the relationship with the buyer, and the amount of the house deposit gift.
A mortgage adviser might also want to track the source of the funds and ask to see documentation proving that they have been building up in the gifter’s bank account or investment statements so they can accept gifted deposits.
What is the maximum amount of deposit that can be gifted?
The lender and individual circumstances will determine the percentage of mortgage deposit that a gift can cover. However, it is possible to gift the entire deposit in most cases.
There is no limit to how much money you can give, but inheritance tax may be due if you gift more than £3,000 in one tax year or if you die within seven years of gifting the funds.
This exception is only when the borrower has a more complicated situation and other factors mean they are using an expert lender. These lenders often require the borrower put some of their own money in, especially if the borrower has a history of negative credit. This is usually a minimum of 5 per cent, but it can go higher.
How to get a mortgage using a gifted deposit
These are the steps you need to follow to secure the best mortgage deal for gifted deposits.
- Gather your documents: We have a list of all the documents you will need in our guide for mortgage applications. However, you will also need to send a letter confirming that the deposit is a gift. Also, you need evidence of the origin of the deposit funds.
- Talk to a mortgage broker If your deposit was gifted, it’s a good idea for a broker to help you. Because they will ensure that you are referred to a lender who will be able to treat you favourably based on your deposit source. It’s not a good idea to pick a lender randomly and then be declined for gifted deposits.
- Let your broker do the rest If you apply through a mortgage broker it is easy from here. They will help you navigate the entire process from application to completion, and ensure you get the best deal possible.
Our network has mortgage advisers who specialize in the arrangement of gifted deposit mortgages. We can connect you quickly to one using our advisor-matching service.
Different types of gifted mortgage deposits
There are many types of gifted deposits. Your chances of getting a mortgage approved may depend on how your mortgage lender views your type of deposit.
Lenders accept the following types of gifted mortgage deposits:
Deposits are given to the family by a loved one
A family-gifted deposit is money that a relative gives to help with a mortgage deposit. Many first-time homebuyers look to their parents for assistance. While lenders may be more strict with distant relatives, there are other options.
While siblings, parents, and grandparents are generally allowed, lenders may not approve a gift deposit from an aunt, uncle, or cousin.
Some lenders are more accommodating to distant relatives than others, while some only will accept family members who are blood relatives. To determine if a family member’s gift is acceptable for a mortgage, consult a mortgage advisor.
Friends can make deposits
Gifted deposits from friends are treated more carefully than family gifts by mortgage lenders due to the possibility of someone unrelated claiming the property in the future and the higher risk of money laundering.
It is hard to prove that a gift deposit received from a friend is genuine. Lenders may also be suspicious that you will have to repay it and could end up in financial trouble.
A mortgage broker may be able to find your options, as there are so many lenders in the market, each with its own rules.
Vendor gifted deposits
This type of gifted equity mortgage is where the seller (vendor) pays a portion or all of the deposit. The seller, the person who sells a property, offers a property to the buyer at a reduced price. They can then use the deposit amount.
If a house was originally listed at £300,000., the vendor might offer to sell it for £270,000. This could be for a quick sale or if the house had been on the market for some time. The £30,000 discount equals 10% of the property’s value. This can be applied to the buyer’s deposit.
Vendor deposit programs are not very common nowadays. Many lenders won’t accept vendor-gifted deposits as mortgages because of the risk that a buyer will put no of their hard-earned cash in. The borrower who puts in less money is considered to be less invested in the property, and therefore more likely to leave if things get difficult.
Builder gifted deposits
Another type of gifted equity mortgage incentive is the housebuilder gifted deposit, also known as developers gifted deposits. In this instance, the developer offers the buyer a property for a discounted price compared to the original asking prices.
Builders generally gift builders with gift deposits for new. They are a common incentive to encourage quick sales.
Lenders that will consider you will need to make sure the property’s value is equal to the asking price. Most lenders will also require that the borrower contributes some cash (usually because it is unlikely that a builder gift exceeds 10%).
Landlord gifted deposits
A gifted deposit from a landlord is when a buyer buys a property at a discounted price. The deposit can then be used to cover the cost of the property.
Although gifted deposits from landlords to a mortgage are rare, there are lenders who will accept them.
Lenders who will review your application will need to verify that the property is accurately valued and ask that the borrower contributes to the deposit.
These are the key takeaways from this guide
Lenders may not accept all gifted deposits.
The circumstances under which your deposit was gifted and whether your mortgage application is approved will affect the approval of your mortgage.
If your deposit was gifted, you should talk to a broker:
Being rejected for a mortgage by a lender who doesn’t accept your deposit is not something you want. By matching you with a lender that is willing to consider you based on your deposit type, a mortgage broker can help you avoid this trap.
We can help you find the right broker
Mortgage brokers that specialize in non-standard deposit types can make the difference between approval and rejection. Our broker-matching service is free and can match you with an advisor according to your circumstances, needs, and deposit type.
Contact us today, We’ll match you up with the right broker, and arrange a no-obligation chat.
If the person who gifted my deposit died, will I be subject to inheritance tax?
Only if they are dead within seven years from the date you received their deposit. In this case, inheritance tax will be due if the estate of the deceased (including the gift) exceeds £325,000.
What happens when a gifted deposit becomes savings?
If funds were given to you for a deposit within the last twelve months, and you can prove that you have not been repaying them, a mortgage lender will consider the gift legitimate.
All gifted funds held in your account for more than 12 months will be considered savings.
What are the requirements to show proof of gifted deposits?
The lender will require proof that you have received the money in the past 12 months to deposit a mortgage loan. By completing the gifted deposit declaration paperwork, you can prove that the deposit was received as a gift to your solicitor.
The gifter will be informed in writing that the deposit funds were a gift and will not have to repay them.