For many younger people it isn’t the ability to keep up with mortgage payments that prevents them stepping onto the property ladder. The problem is the deposit. Normally, buyers need to find a minimum 5% of the purchase price for a deposit (in addition to legal fees, stamp duty and other expenses). They may need 10% or more to access lower interest rates.
Step forward the so-called Bank of Mum and Dad. Or maybe it should be the Bank of Family and Friends. Gifting a deposit isn’t always as straightforward as you might think. For one thing, your mortgage lender will need to know the source of all funds used for your purchase.
Here are a few of the most common questions and answers about gifted deposits.
Can anybody gift a deposit?
In theory, yes. In practice, mortgage lenders prefer a close family member. Some specify that it must be your parents.
Why do lenders care where the money comes from?
Apart from legal obligations under money laundering laws, there is also the question of who owns the property. The mortgage lender will want to be sure there are no other potential claims on the property should you default on the payments.
What will a lender expect to see before agreeing the loan?
Normally, they will expect to see a gifted deposit declaration to confirm that the gifter will not own any part of the property. They may also want to see a bank statement to prove that you have the funds.
Can the gifted deposit be a loan?
If the gift is treated as a loan it will affect your affordability calculation (just like a bank loan or any other regular payments you make). Your lender might also be concerned about another party having a claim to part of the property if the gifted deposit loan is not fully repaid. They will most likely require a loan agreement between the two parties, detailing the amount advanced, repayments and interest. You will need to consult a solicitor to have this drawn up
Are there tax implications?
If the person gifting the deposit dies within seven years, there may be an Inheritance Tax liability.
Are there alternatives?
You could consider ‘family offset mortgages’ where family members put a 5% or 10% deposit into a savings account with your mortgage lender. The money will be locked away for a fixed period, or until you’ve paid off a certain amount of your mortgage.
Alternatively, your family could act as a guarantor, effectively using their own property as security.
What to do next
If you have any questions about gifted deposits or any other aspect of buying your first property, get in touch with the friendly team at PowellsLaw.