Enter the bank of mum and dad (BoMaD). Some hopeful homeowners are fortunate enough to be offered a ‘helping hand’ onto the property ladder, in the form of a gifted deposit.
If you’re considering gifting a deposit to someone, or you’ve been offered financial support from a family member and want to know how this will affect your mortgage options, read on. This guide covers all you need to know about gifted deposits.
What is a gifted deposit?A gifted deposit is a sum of money given to a homebuyer - usually by a family member - to put towards a deposit on a property.
The most distinguishing thing about a gifted deposit is that it must indeed be a gift, rather than a loan. Lenders have very different views on the two, so if you’re gifting a sum of money, you must sign a declaration confirming that there is no stipulation for the receiver to pay you back.
While some mortgage providers are happy to accept loaned deposits, if you are expected to repay the sum before you sell the property, it will be considered a financial commitment and factored into affordability calculations - which could impact your borrowing options.
Ways of gifting a depositThere are a number of ways in which you can gift a deposit, with the most common being a bank transfer of funds from your savings or current account, into the giftee’s account.
If your money is tied up elsewhere, you might consider withdrawing funds from your pension, or releasing equity from your own home. However, both these options could have significant implications on your future, so seek financial advice before doing so.
Even if you don’t have the cash at hand, there are other ways you can help a loved one buy a home; guarantor mortgages, joint mortgages or family offset mortgages are just a few options you might want to explore.
Who can gift a deposit?Reliance on BoMaD has soared in recent years; research conducted in 2020 found that over £500m was gifted by over-55s during that year alone.
While many first-time buyers turn to their parents for financial support when purchasing a home, mum and dad might not be the only suitable candidates where gifted deposits are concerned.
Family-gifted depositsAside from parents, who are usually permitted to gift their child a deposit without question, other close relatives including siblings, grandparents and partners are widely accepted by mortgage providers.
More distant relatives on the other hand, such as great aunts, uncles or cousins, may not be eligible.
It all depends on the lender; some won’t allow gifted deposits from anyone outside the immediate family, whereas others might be more lenient but stipulate that the person gifting the funds be a blood relative.
Friend-gifted depositsLenders can be far more wary about accepting gifted deposits from friends. Reasons for this include difficulties identifying the source of funds, and the risk of having someone outside the family laying claim to the property later down the line.
Although your choice in lenders is likely to be smaller if you’re considering applying for a mortgage using a friend-gifted deposit, the increased down payment could still give you access to more competitive rates. Speak to a broker for help weighing up your options.
Gifted equity deposits (Concessionary Purchases)A ‘gifted equity deposit’ or ‘concessionary purchase’ is when a company or individual offers to sell you a property at a discounted rate from the true market value.
While some mortgage providers might consider accepting this form of deposit, many will consider the property’s value to match the agreed purchase price - meaning you may be required to make your own deposit contribution anyway.
There are several different types of concessionary purchase types to be aware of, some of which are more common, and more widely accepted, than others.
- Concessionary family-gifted deposit
Family gifted equity is fairly common, and as it’s easy to prove the legitimacy of the arrangement it is considered fairly low risk, and lenders are usually quite comfortable for it to make up 100% of the deposit.
- Builder-gifted deposits
While there are a number of lenders who are happy to consider builder-gifted deposits, you may have to contribute some of your own cash on top as new-build deposit requirements are usually slightly higher than average, around 15 - 20%.
- Vendor-gifted deposits
Vendor-gifted deposits are not particularly common anymore, and lenders can be cautious about accepting them. Those that do may question whether the original asking price reflects the true market value, and / or may stipulate that you add your own cash to the deposit.
- Landlord-gifted deposit
Again, those lenders that will consider landlord-gifted deposits will want to confirm that the original asking price accurately reflects the property’s value, and may ask you to contribute to the deposit out of your own pocket for added security.
How do mortgage providers view gifted deposits?Lenders are usually happy to accept gifted deposits, but depending on who you approach, there are a few factors that can have an additional impact on your eligibility.
Where the gift has come fromAs covered, lenders have different stances on who they will accept gifted deposits from. Close relatives, such as parents, grandparents, partners and siblings, are usually permitted without question, but gifts from more distant family members or friends may not be.
Likewise, some lenders may be happy to consider builder - or vendor-gifted deposits, whereas others aren’t. It’s all very much case-dependent, so you’re best off asking a broker which lender is best to approach if your situation is slightly more complex.
How much of the deposit is giftedDuring the pandemic, some highstreet banks and building societies tightened the reins on gifted deposit requirements, stipulating that gifts could only account for up to 25% of mortgage applicants’ deposits.
Fortunately, lenders have since relaxed these rules, and in many cases it’s possible for the gift to make up 100% of the deposit. This may not be possible with some types of concessionary purchases, or if your other circumstances present risk to the lender.
If you have other factors counting against you, such as bad credit history or low affordability, lenders often have stricter lending terms to counteract the added risk. In which case, you may be required to contribute on top of the gifted deposit yourself.
How to prove a deposit has been giftedIf you’re gifting a deposit, you must provide lenders with a signed declaration confirming that the funds should be treated as a gift, and that the borrower is under no obligation to repay.
Mainstream banks might have their own forms for you to fill out, otherwise you will need to send a signed and certified letter containing the following:
- Your name and the name of the applicant.
- Your relationship to the borrower.
- The sum of the gift.
- The source of the funds (within the UK, within the EU, or outside of the EU).
- A signed declaration that you have no financial interest in the property.
- A signed declaration that there is no expectation of repayment.
- Photo ID and proof of address.
Gifting a deposit might seem like a simple enough concept, but when you’re dealing with large transfers of cash, lenders have to err on the side of caution to prevent the risk of money laundering.
As such, the process can be complex if the funds are sent from overseas or by an unknown source, and lenders may not accept the applicant or carry out further investigations until they are satisfied that the transaction is genuine.
Are gifted deposits subject to tax?If you are gifted a sum of money from a close relative it will be classed as a Potentially Exempt Transfer.
So long as the gifter doesn’t die within seven years, it will not count for inheritance tax (IHT) purposes. If they do pass away during this time, it will become a Chargeable Transfer, and may be subject to IHT.
It is possible to gift up to £3,000 per financial year without qualifying for IHT, and you can also carry any unused allowance forward a year - meaning you can gift up to £6,000 (£12,000 if you’re a couple) without being liable.
After this point, IHT is due on the portion of the estate worth over £325,000, at a rate of 40%. If you qualify for 'main residence allowance', an additional £175,000 can be added to the ‘nil-rate-band’, meaning you won’t be hit by IHT up to the value of £500,000.
Always seek advice from a qualified tax accountant.
What else can impact eligibility if you have a gifted deposit?As with any mortgage application, if you pose a potential risk to mortgage providers your options may be more limited.
While being gifted a sum of money doesn’t necessarily raise a warning flag, if you don't make any contributions to the deposit yourself, lenders may be more skeptical about lending to you as you have not demonstrated your financial commitment to the purchase.
The following factors can also affect your chances of being accepted:
Gifted deposits and self-employmentIf you’ve been gifted a deposit as a self-employed applicant, it’s advisable to seek specialist advice as some lenders still perceive those who work for themselves to be higher risk, which can limit your mortgage options.
Adding your own contribution on top of a gifted deposit may improve your chances, or you could speak to broker and ask to be directed to a lender who will not penalise you based on your employment status and deposit circumstances.
Gifted mortgage deposits and bad creditIf you have a history of adverse or a credit score that’s seen better days, finding a willing mortgage provider can be problematic. Lenders that will consider you may limit how much you’re able to borrow or ask for a higher deposit to outweigh the risk.
If you have a 100% gifted deposit, you may improve your chances of being accepted, and secure a better interest rate as a bad credit applicant, by adding your own contribution on top.
Saving and putting your own money towards the purchase will show lenders you’re serious about the commitment, and demonstrate your ability to manage your finances.
Gifted deposits and non-standard constructionsAny property that falls outside of the ‘standard construction’ type is typically deemed higher risk by mortgage providers, meaning your prospective lender pool may be smaller, and the rates you’re offered may be less competitive.
Although criteria vary by lender, those that are willing to lend on your non-standard construction property are likely to have higher deposit requirements, so you may need to make up the difference on top of a gifted deposit.
Gifted deposits and borrower ageOnce you reach age 55, your mortgage options begin to change because of concerns surrounding your affordability, and the likelihood of you surviving the standard 25 - 30 year mortgage term decreases.
To mitigate against this risk, many lenders have maximum age limits for when you can take out, and finish repaying, a mortgage, which can mean the term lengths you’re offered are shorter.
There are plenty of later life lending options available, and it’s very possible to use a gifted deposit towards a property purchase so long as your income is sufficient. To boost your chances, consider adding to it out of your own savings or pension if it’s viable to do so.
Speak to an expert for further advice on gifted depositsIf you’ve been gifted a deposit, or you’re considering offering financial support to help someone onto the property ladder, our experts are at hand to talk you through your options and discuss the potential implications.
More often than not, a gifted deposit can present plenty of opportunities for buyers, so don’t shy away from seeking advice if your circumstances are slightly complex.
Not only is our team highly experienced in arranging gifted deposit mortgages, we have access to over 100 highstreet banks and niche lenders, so we know exactly who is best-placed to approach, depending on your circumstances.
Call us on 02380 980304 or submit an enquiry via our simple online contact form, and a member of the team will be in touch.