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Gifted Deposit Mortgage
Steven Harman explains gifted deposits and answers some frequently asked questions.
What is a gifted deposit and how does it work?
It’s where a deposit is gifted to you to help you get a mortgage. The typical example is where the Bank of Mum and Dad contributes a lump sum to a First Time Buyer for their first home.
First Time Buyers may be renting a property and their outgoings are high because of expensive rents. They may have managed to save up some deposit, but a parent can boost that deposit amount with a lump sum gift to the applicant.
Can I use a gifted deposit as a First Time Buyer?
Yes, and perhaps you’d think of this as being mainly for First Time Buyers, but it’s not restricted to those. People might have generous relatives who will contribute towards any house purchase.
It might be for a second-time buyer or anybody else. But certainly a First Time Buyer can use a gifted deposit.
What are the mortgage criteria for a gifted deposit? Do all mortgage lenders accept gifted deposits?
The criteria for a gifted deposit varies depending on the lender. Typically speaking, they will accept them, but want to be able to demonstrate where the funds are from.
We need to see that the funds are from a legitimate source. There are rules to make sure that any money brought into the UK system is from a source where all due taxes have been paid and we can demonstrate where those funds are from.
Typically lenders will want to see a gifted deposit from a close family member. However, some lenders are more flexible on that point, as we’ll cover later on.
Do I need a gifted deposit letter? If so, what needs to be included?
Yes, you would need a gifted deposit letter. The letter is written by the person gifting the money, and it confirms that the gift is being given freely. Typically, it would say that it is not to be returned or refunded, and the person giving the gift won’t retain an interest in the property.
We would create a letter for our clients to make it nice and straightforward for them. It would identify that person and state that they are gifting X amount to someone – a child or a relative, etc. The letter explains that this is to assist with the purchase of the property, stating the address.
There are variances to that, but generally speaking lenders just want to see that it’s not a loan and is being freely given. Usually they also ask the gifting person to confirm that they are not going to live in the property.
Again, there are exceptions and part of what we do is assess the situation. Then we find you the most suitable lender. Everybody wants to pay as little as possible in interest and mortgage costs. We look at the lenders’ criteria and find the cheapest version of whatever the client is looking for.
Can I only receive gifted deposits from family members?
Not necessarily. It depends on the lender. Some lenders have quite strict criteria around which family members are eligible, for example. They may only allow close family members – a parent, sibling or a grandparent.
Other lenders will allow a gifted deposit from a friend or or a cousin, an acquaintance, or even an ex-partner. Or, perhaps a current partner is contributing towards the deposit, but for various reasons, doesn’t want to go on that particular mortgage.
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Is there a limit on how much can be gifted?
No, not as far as I’m aware. There are no lower or upper limits.
What will happen if a gifted deposit is not declared?
Any time you’re dealing with financial services, you would not be able to hide something like that. If you are in receipt of a gift, ourselves as advisors, the lender and the solicitor will all have a good look at that.
If you’ve mysteriously had £20,000 come to you, we’ll be asking questions. Part of our duty is to make sure that the funds are from a legitimate source, with a clear path of where deposit funds have come from.
We’d be asking you to document that with statements to show how you’ve accumulated that deposit. Generally speaking, there’s no reason not to declare a gifted deposit.
How do solicitors check the source of funds?
Solicitors will check them in a similar way to ourselves. We would ask for three to six months’ bank statements to see those funds in a UK bank account.
If it was foreign currency funds, we would need bank statements from that account, which may need to be translated. The solicitor is probably going to duplicate that work.
At the point of applying for a mortgage, we’ll collect all the documents and get a gifted deposit letter for our clients, to save you that task. The gifter signs that and sends in their ID and bank statements. Having that ready also helps with the solicitor’s process.
What is the alternative to gifted deposits?
The alternative to a gifted deposit is any other source of deposit. That might be your own savings that you’ve accumulated month by month from your salary or bonuses etc.
If somebody is selling a property and buying again, they may be using the equity from that sale as part of their deposit.
You can buy a property with a minimum of a 5% deposit in lots of cases. There are a couple of exceptions to that minimum. But if you’ve got a 5% deposit and your income matches up for the mortgage, you could do it that way.
What are the pros and cons of a gifted deposit?
The big positive is that you have got a bigger deposit in proportion to the property’s value.
Perhaps somebody has managed to accumulate a 5% deposit, which is no mean feat if they are paying rent etc. With a 5% deposit, you would be borrowing at 95% Loan to Value. So 5% of the purchase price is coming from your own resources and 95% is coming from the mortgage.
In that case, you would pay a higher rate of interest than somebody with a 10% deposit. With each 5% increase up to a 40% deposit, you will typically get a preferential interest rate.
So a gifted deposit could take you from having a 5% deposit to perhaps 15%. That
results in a better interest rate, which means a lower monthly payment. That is definitely a pro of a gifted deposit.
The only negative of a gifted deposit would potentially be for the person gifting it.
What else do we need to know about a mortgage with a gifted deposit?
We’re always very careful with these to make sure that the communication between us and the person gifting the funds is very clear.
We’re going to ask for documentation from that person. When we ask people for their ID and bank statements, they need to have a good understanding of how that information is going to be used, what it’s for, what’s going to happen and when.
A mortgage broker can speak directly to the parents in this example to explain how that information will be looked after and why we need it. There can be nervousness, quite understandably, around fraud. We can help reassure the parents and make sure they are comfortable.
They may also have questions of their own. We prefer to be open with everybody. If you want to speak to us, we can share details about your child’s mortgage. We will talk you through the steps and help with regards to the gifted deposit letter.
Some lenders have their own templates to fill out, which are relatively straightforward. Others want a basic letter, which myself and the team here will provide. We can also assess the impact on interest rates and all the other things that go along with that gifted deposit.
YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE
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