How do gifted deposits for a mortgage work?

At a glance

• A gifted deposit is a cash gift, usually from a parent or another family member to a borrower or first-time buyer to put towards a house deposit.
• There are rules to follow to ensure your gifted deposit is accepted by the lender.
• They are treated differently to a loan by both a solicitor/conveyancer and lenders.

For many, getting onto the property ladder is a daunting – and expensive – experience.

So, it’s no surprise that family and loved ones may want to lend a financial hand. This could be in the form of a gifted deposit – often courtesy of the bank of mum and dad.

What is a gifted deposit?

A gifted deposit is money given to a borrower to cover, or partially cover, a house deposit. Importantly, as their name suggests, they are a gift – so there is no expectation to pay the money back and the gift-giver doesn’t hold any rights to the property.

However, giving someone a gifted deposit isn’t as simple as transferring the money to the person you want to help out. There are gifted deposit rules in place that must be followed to ensure the money is accepted by the lender.

Who can give a gifted deposit?

While this can vary between lenders, most gifted deposits come from family members. Below is a list of people who could give you a gifted deposit:

• Parents
• Step-parents
• Grandparents
• Siblings
• Aunts/Uncles
• Partners
• Parents-in-law

In theory, anyone can give a gifted deposit. Money gifted by friends and distant family (such as cousins) may be accepted by some lenders, however, others won’t allow it. If you’re unsure, it’s always best to check with individual lenders to see who they will accept a gifted deposit from.

Benefits of a gifted deposit

A gifted deposit could help first-time buyers get onto the property ladder quicker as they won’t need to wait as long to save up a deposit on their own. It also means they will need to borrow less and, as they would have a lower loan-to-value (LTV), they may get a lower mortgage rate.

For example, if you are looking to buy a property worth £200,000 and you’ve saved £30,000, you would need a mortgage that can finance up to 85% LTV. But, if your parents give you £20,000, in total you now have £50,000 for your deposit. This means you would be eligible for mortgages with a maximum LTV of 75%.

To make sure your gifted deposit is accepted by the lender (and your solicitor or conveyancer), it’s important to remember there are gifted deposit rules to follow.

How do gifted deposits work?

You will first need to agree the sum with the person gifting the money and then add this to the amount you have saved. Once you know how much you have for your overall deposit, this can help to focus your property search. Then, after you’ve found a property and you’re ready to apply for a mortgage, you will need to declare the gifted deposit to the mortgage lender and conveyancer/solicitor.

When you declare your gifted deposit, a solicitor will perform a series of checks. These include verifying the identity of the gift-giver and filling out or writing a gifted deposit letter.

Lenders and solicitors typically require donors to provide photo ID and documents to act as proof of their address.

Gifted deposit letter

A gifted deposit letter is used to confirm the gift. While many lenders, especially major banks, will provide you with a template, other smaller lenders may require the person giving the money to write it themself.

A gifted deposit letter should include the following information:

• The name of the person giving the money and their relationship to the borrower.
• How much is being gifted
• Where the money has come from
• Acknowledgement that this money is a gift and there’s no expectation of paying it back
• Acknowledgement that the gift-giver won’t hold any claim to the property
• Evidence that the gift-giver can afford it.

Proof of funds

The person giving the money will need to prove where they got their funds from, whether that’s from equity release, savings or another avenue (like a property sale or inheritance). The solicitor will carry out anti-money laundering checks to ensure the money has come from a reputable source.

To do this, the solicitor may need to see certain documents and evidence that can act as proof of the gifted deposit. These could include:

• A solicitor’s letter for a house sale - if the money has come from the sale of an asset or property
• A letter from an executor or solicitor – if the cash has come from inheritance
• Pension withdrawal statements - if the funds have come from the donor’s pension
• Bank statements tracking the accumulation of funds - if the money has come from savings
• Statements showing sale and transfer - if the money has come from investments.

Do solicitors charge for a gifted deposit?

As they will need to carry out identity checks and check the source of the gifted deposit – some solicitors may charge an additional fee for handling a property purchase with a gifted deposit. Others may include it in the price of their initial conveyancing quote – so long as you have declared it. Some charge no extra fee at all.

What if you don’t declare a gifted deposit?

Not declaring your gifted deposit could affect your mortgage application, as it’s a legal requirement that any gifted amounts are declared to the lender (and to the solicitor handling your purchase). Hiding the source of funds used to purchase a home is classed as mortgage fraud – which could lead to fines, or in some cases, imprisonment.

If your conveyancing solicitor discovers that you have hidden your gifted deposit, this could lead to delays and extra fees. They are also obligated by law to report suspicious activity – which could ultimately lead to your application for the mortgage being rejected.

What’s more, if the gifted deposit is only discovered after completion, lenders could take legal action or repossess the property.

Tax implications of gifted deposits

In the UK, gifted deposits aren’t typically taxed, however, they could potentially be subject to inheritance tax (IHT) if the donor dies within seven years of giving the money.

The gifted sum will be treated as a Potentially Exempt Transfer (PET). No IHT will be due if the donor lives for at least seven years after making the gift, but if the donor dies within seven years you may need to pay IHT. However, there are several ways to give cash without any tax implications, including the annual exemption which allows individuals to give up to £3,000 tax-free per year, for example. Read more about the tax rules and allowance on cash gifts.

Are there any problems with gifted deposits?

Gifted deposits can require more checks as lenders will need to investigate where the money was sourced from. What’s more, some lenders won’t accept gifted deposits if they come from friends or non-immediate family, for example.

There’s also the possibility, however slim, of inheritance tax to consider.

Alternatives to gifted deposits

Instead of a gifted deposit, family members and friends could help support first-time buyers in other ways, such as:

• An interest-free loan

You could borrow the money from a family member in the form of an interest-free loan. Borrowers will still need to declare this to their mortgage lender and solicitor, who are likely to treat it in a similar way to any other loan. Because you would need to repay it, this could impact your affordability checks and the amount you can borrow.

• A guarantor mortgage

This is when someone (usually a parent) agrees to ‘guarantee’ your mortgage, which means they will be responsible for making the payments if the borrower is unable to. Becoming a mortgage guarantor is a big undertaking and should be thought about carefully. A guarantor must be able to financially cover your payments, alongside any of their other outgoings. To compare guarantor mortgages, and for more information, see our chart.

• Take out a joint mortgage

Opting for a joint mortgage, so buying a house with a partner, family member or friend, is another alternative option. It can help improve your purchasing power – as more than one person’s incomes will be considered on the mortgage application. However, it’s a big decision to make as you must be comfortable with being linked financially to this person.

• Joint borrower, sole proprietor mortgage

Typically used by parents or family members to help a first-time buyer get onto the property ladder, joint borrower sole proprietor mortgages allow multiple people to buy a house with only one person named on the title deeds as the owner. As everyone who helped purchase the property is responsible for making repayments, any missing ones can damage all borrowers’ credit scores. A joint borrower sole proprietor mortgage can be a good way to make the housing market more affordable for those just getting started and can also allow individuals to access more competitive rates than they would alone.

• Family offset mortgage

A family offset mortgage is where a borrower’s family member (or more than one) puts their savings against the mortgage in the place of a deposit. The savings are then deducted from the overall loan, reducing the amount owed. After the borrower has paid back the agreed percentage (typically between 25% - 30% of the mortgage) within the specified timeframe, the money will be returned to the family member (with interest).

This type of mortgage can help first-time buyers enter the property market sooner, as saving a deposit can be a lengthy process, and can mean borrowers have more affordable repayments.

• Lifetime ISA (LISA)

Although it’s not necessarily an alternative to a gifted deposit mortgage, another option for borrowers aged 18 to 39 who are saving towards a future house purchase is to open a Lifetime ISA (LISA). Borrowers can add up to £4,000 into a LISA each tax-year and the Government will pay a 25% bonus on all deposits. To learn more, head to our LISA chart.

Need more support?

For further information and support on taking out a mortgage with a gifted deposit – or if your situation is more complicated – it may be worth speaking to a mortgage broker.

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