Getting a mortgage with a gifted deposit

With property prices sometimes rising, it can be difficult to get the funds together for a deposit.

This is where a gifted deposit as a lump sum can help you get on the property ladder.

Gifted deposits can also increase your mortgage options and reduce the amount of interest you pay. Here are some key points to know before you apply for your gifted deposit mortgage.

What's a gifted deposit?

A gifted deposit is when someone gives you a deposit. This can be from anyone, but it's usually from a family member or close friend.

When you’re buying a home with a mortgage, you need a deposit to put as a down payment on your mortgage.

When you receive a gifted deposit it should be exactly that, a gift. So, the donor shouldn’t expect to be paid back or have any ownership of the property in exchange.

How does a gifted deposit work?

The donor gifts you cash which you can use as all or part of your deposit towards the mortgage for your home.

You would then keep the gifted cash in your savings while you compare mortgages. Once you've found the right deal for you, you can use the money to then secure your dream home.

Gifted deposits are great for first-time buyers because it helps give you a bigger amount in deposit which in turn reduces your mortgage loan to value (LTV). Typically, a lower LTV means you can have access to better mortgage deals.

Do I need to prove my deposit is gifted?

Yes, anyone buying a house needs to be able to prove where they got their deposit from. This applies to gifted deposits too.

You must provide what's called a 'gifted deposit letter'. This is a letter written to your solicitor as proof that the deposit is a gift and not a loan.

The person who's gifting the deposit is likely to need to write the letter and send other proof.

What proof does the person gifting the deposit need to give?

The donor needs to write the gifted deposit letter containing the following information, but always check with your lender and solicitor for exactly what to include:

• The relationship of the donor to you or whoever the gift is for
• The amount they’re gifting
• Confirmation that they know the gift is non-refundable
• Confirmation that they don’t have any legal rights on the property.

The donor will have to sign and date the letter. You’ll also need to get a witness to sign the letter.

The donor might have to give proof of where they got the money from too. Your lender might ask for:

• Photo ID, like a passport or driving licence
• Proof of address
• Bank statements.

This is just standard practice to check for money laundering. Your solicitor will probably ask for these documents too.

Who can give a gifted deposit?

Usually a gifted deposit is given by your parents or grandparents.

Other family members can offer you a gifted deposit too, but you may have to go through more checks.

Usually lenders are more wary if a third party, for example a friend or friend of the family wants to gift you a deposit. They may have to go through further checks too.

Which mortgage lenders accept gifted deposits?

Gifted deposits are widely accepted by lenders, as long as you can prove that the money is a gift.

Lenders are also becoming more flexible on who they accept gifted deposit from. For example, Nationwide allows anyone over the age of 18 to gift a deposit.

Each lender varies, but you can speak to expert advisors at Mojo mortgages about lender's rules for gifted deposits.

Are gifted deposits subject to tax?

This depends. If your donor dies within 7 years of giving the gift, you may have to pay inheritance tax.

You’d only have to pay this if your donor’s estate – the wealth they’ve accumulated over the years – is more than £325,000. This is including the gifted deposit.

If your donor’s estate is worth more than this with the deposit, you may have to pay a tax of 40%. But this is only on the part of the estate that’s over the £325,000 threshold.

For example, if the estate is worth £500,000 and the tax-free part is £325,000, tax would be taken from the £175,000 (£500,000 minus £325,000).

For more information visit GOV.UK.

Another option instead is to accept a £3,000 tax-free gift on a yearly basis which you can build up and add into your savings over the course of several years. If you do this, the money would no longer be considered a gifted deposit and you won't need to send a gifted deposit letter as proof. The money also won't be subject to inheritance tax.

Alternatives to gifted deposits

If you haven’t got a gifted deposit, there are other ways your family can help you get on the property ladder. For example:

• Guarantor mortgages - here, typically a parent or guardian uses their home or savings as collateral if you can’t pay your mortgage. This reduces the level of risk for lenders as they know they’ll be able to recoup any losses from your guarantor if you can’t pay your mortgage.
• Joint mortgages - this is where you, a family member or friend applies for a mortgage together. Your joint earnings are considered, so you might have more mortgage options.
• Joint-borrower-sole-proprietor (JBSP) mortgages - allows up to 4 people to buy property together but only 1 person to be the sole owner. This is ideal if your parents want to contribute an amount each month, but not co-own the property with you.
• Family assisted mortgages - there are a few different types, some use the money of a family or friend held in a savings account, others use security. The money is then held on a temporary basis until the borrower has paid to the point where a deposit would've usually secured their mortgage.