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Gifted deposits for first-time buyers explained
A gifted deposit is when somebody – usually a family member – gives a homebuyer money towards their deposit, or gifts them the entire amount needed.
The crucial thing to remember here is that a gifted deposit is a gift, with no agreement for the homebuyer to repay the money.
Lenders will require documentation to prove this, which needs to be signed by both parties and detail the donor’s name, the relationship to the buyer, and the value of the gift, as well as a statement confirming the money is given with no expectation of repayment.
If a family member can help increase a deposit, say from 5% to 10%, or from 10% to 20%, this in turn opens up more mortgage deals to borrowers and allows them to reduce the amount they pay each month.
A gifted deposit is therefore the simplest way for parents to help their children get on the property ladder.
Who can gift a deposit?
Some lenders stipulate who can gift a deposit. Immediate family, such as parents, siblings and grandparents are usually permitted, but more distant family members such as aunts and uncles, or people who aren’t related to you at all, may not be allowed.
Before your family gifts you money for your deposit, you should make sure that you check with your mortgage adviser or lender that it will be accepted.
Most lenders will not permit a gifted deposit if the person gifting it is the vendor. This may seem unlikely, but it could be an issue if you’re buying a property from your parents for example.
How much of the deposit can be a gift?
The percentage of mortgage deposit a gift can make up will depend on the lender and other individual circumstances, but in most cases it is possible for the whole deposit to be gifted.
The exception to this is when the borrower has a more complex scenario and other factors mean they are using a more specialist lender.
Such lenders tend to require the borrower to put some of their own cash in, especially if there is a history of adverse credit. Often this is a minimum of 5%, but can sometimes be more.
What are the alternatives to a gifted deposit?
There are a few alternative ways that parents can help their children get on the property ladder, and different ways borrowers can get their deposit together too.
These include:
- Parents being named as a guarantor on a 100% mortgage.
- Parents offsetting their savings.
- Parents taking out a joint mortgage with their children.
If parents can’t help, government schemes such as Help to Buy or shared ownership might also be good options.
A Help to Buy ISA helps you save for a larger deposit too.
Mortgage lender criteria for gifted deposits
If a gifted deposit is forming part of your house-buying, there are a few things to keep in mind. Each mortgage lender will have their own rules, but usually they will fall under two main points:
Proof of gift
Your lender may want whoever is gifting you the money to make a written declaration that it’s a gift, and that you’re under no requirement to pay it back.
If you do have to pay it back, the lender will consider it a loan and may not allow it.
Alternatively, they might add the repayments to your monthly outgoings, which they will assess to determine whether you can afford the mortgage repayments.
This could impact your affordability and stop you from borrowing the amount you need, as borrowing money for a mortgage deposit is generally frowned upon by lenders for these reasons.
No right to the property
Your benefactor may also be asked on the gift deposit form whether they expect to have any equity or interest in your property, or whether they expect to have the right to live in it after purchase.
As such, it’s likely that they’ll need to sign a declaration stating they relinquish any legal interest in the property.
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