Saving a deposit for a home is an enormous challenge for any would-be first time buyer.
UK house prices keep rising, and so deposit levels have to increase to keep up.
It’s no surprise then that gifted deposits are a common occurrence when buying a home for the first time. Keep reading to find out what gifted deposits are (and are not), how they work and how they can help you get on the property ladder.
Mortgage deposits explained
Deposits are an essential part of buying a property.
Most of us will need to borrow money via a mortgage to purchase a home. Mortgage lenders don’t offer 100% mortgages, where they fund the entire purchase price.
This is too risky for them.
So you, the buyer, has to put some cash in as well, and this is your mortgage deposit.
Lenders need certain levels of deposits, depending on the style of customer, loan, or property. And these levels are expressed as a percentage of the purchase price.
A 95% mortgage needs a 5% cash deposit. A 75% mortgage needs a 25% cash deposit, and so on.
You will find more useful information in our Guide To Deposits
What exactly is a Gifted Deposit?
When you apply for a mortgage, you will also need to have saved up a cash deposit.
A gifted deposit is a sum of money that has been given to you from someone else, usually a close family member, to help you buy a property.
This money can be used to form all, or part, of the mortgage deposit.
Importantly, it must be an outright gift, that never needs to be repaid.
According to gov.uk, 36% of first-time buyers in 2022-2023 received cash from family or friends to help them buy a home.
Do gifted deposits have to be from family?
Most deposits are given by parents or grandparents to their children.
There’s no doubt that lenders do prefer gifted deposits when they have come from a close family member, rather than outside of the family.
That said, it is still possible to have your deposit funded from a donor who is not part of your family. The gift must not be repayable, at any point. And the lender will require some extra checks, which can take more time.
Where can the money come from?
So a gifted deposit has to be an outright gift. It will never be returned.
Gifted deposits will mostly be funded from cash savings. But there are occasions when borrowing the money is needed, perhaps where there is insufficient savings.
Depending on the age of the parent, there are two main options:
- Capital raising remortgage – Borrow more money with a remortgage.
- Lifetime mortgage – Access your home equity
You might like this: Can I give my children money from equity release?
Which mortgage lenders accept them?
Most lenders will be happy to consider a gifted deposit, but this will require more checks (and time).
They will need to be satisfied with the origin of the money. The donor needs to provide proof of how the money was accumulated and where it was kept (bank etc).
They will want to establish their relationship to you, and perhaps why they are offering this money.
The donor needs to make a formal declaration that the gift is indeed, a gift. And not a loan in disguise.
Declaring a gifted deposit
Both the lender and the conveyancing solicitor will ask where your mortgage deposit money has come from.
For example, this could have come from savings or investments, or perhaps an inheritance.
It’s also possible for the money to have been borrowed via an equity release plan or personal loan.
For a lender, a gifted deposit requires a set process of approval. It is essential for your mortgage application that this process is successful.
Gifted deposit declaration
This is a formal declaration, or letter, given by the parties gifting the money. It needs to confirm that the money is a gift and not a loan, and that the donor will have no ownership or control of the property to be purchased.
Proof of ID
UK Anti-Money Laundering rules require that proof of ID and address shall be obtained for all parties to a mortgage, including the deposit donor.
Source of the funds
Proving where the money has come from. This is not as straightforward as it may sound.
Where funds have been saved over a long period of time or have come from different sources, the solicitor will need enough supporting evidence to reassure them of the origin.
Because of this, always keep copies of statements, deposit receipts or cheques that relate to any money you are saving towards a property.
Is there a deposit limit?
There’s no limit on how large a gifted deposit can be. As long as the donor confirms that it is a true gift then it should be fine.
Adding to the deposit
You may choose to increase the deposit by using your own savings to top-up the amount.
This will lower the amount you need to borrow, making the mortgage repayments more affordable. It may also open up access to a better range of mortgage deals, or lenders.
Speak to your broker so they can see what affect this would have.
How do student mortgages work?
Buy for uni, or student mortgages, are a type of mortgage that allows students to buy a home rather than rent. Gifted deposits are often part of the arrangement, which also needs a guarantor.
Alternatives
If your parents or family aren’t able to gift you money, then there are other ways they can help you.
Joint mortgage
Having a joint mortgage with your parents could be one way for you to borrow more money.
TOP TIP!
If you are researching your mortgage options, and you know that gifted money will be used for the deposit, you must tell your mortgage broker or lender.
This is a vital part of the mortgage puzzle that they need to know upfront.
Tell them when you have your very first conversation, even if all of the details are not yet known.
Having a gifted deposit does change how a broker researches and approaches lenders. And if the donor is not a close family member, there will be a few lenders that won’t be interested.
It also affects how much a solicitor charges (as they do the checks). So make sure they know so you don’t get any nasty surprises further down the line.
What’s the difference between a mortgage deposit and an exchange deposit?
The mortgage deposit is the sum of money that you have saved and intend to use to help purchase a property. But when exchange of contracts takes place your solicitors will need an “exchange deposit” and the amounts of money will not necessarily be the same!
