Hefty deposits are usually what stands in the way of a first time buyer taking their first steps onto the property ladder, which is actually really frustrating if you can afford the monthly repayments to get the mortgage, but just don’t have the lump sum for a deposit right now.
That’s why many people are turning to their parents for help: enter the bank of Mum and Dad.
The bank of Mum and Dad
Many parents want to help their children buy their first home, and understand the struggle they face with affording the deposit.
To give them a head start, parents or family members who can afford to do so, often end up paying all, or part, of the deposit on behalf of their children.
By helping out in this way, it can help to reduce the monthly repayments on your mortgage too, as it’ll give you access to more mortgage deals and better interest rates.
What is a gifted deposit?
A gifted deposit, or a down payment gift, is a sum of money that’s been strictly given to you from a family member to either go towards, or pay for the whole of your deposit.
As the money is gifted, you won’t have to pay it back, unless specifically stated otherwise.
Both the buyer, and the family member will have to sign a ‘gifted deposit letter’ or a ‘deed of gift’ to confirm that the money does not need to be repaid.
The letter will also state:
Proof of address
Proof of identity
What their relationship is with the applicant
The amount of money they wish to gift
That their gift is non-refundable
That they will hold no legal charge over the property
Understanding that the gift is an act of kindness and not out of any commercial interest
The person gifting the money may also be required to provide a bank statement as proof of where the money came from.
This is part of a standard money laundering check and nothing to be concerned about.
How much money can be gifted?
You can gift as much or as little as you’d like. The only drawback is a potential inheritance tax.
If the person who gifted you the money passes away within seven years, you will have to pay inheritance tax on the amount given to you.
Will a gifted deposit affect my mortgage?
In most cases, no, but it may do if the money needs to be repaid, or if the person gifting the money is not a direct family member.
If you have to pay it back then most lenders will consider it like any other outstanding debt.
This means you’ll have less spare money to meet your monthly payments, which can affect your mortgage affordability.
However, this will all be taken into consideration at the time of applying for your mortgage.
Gifted deposits can be used in conjunction with Help to Buy schemes and your own savings.
Alternatives to gifting money
You may want to help your loved one buy a house, but you might not have the spare cash to do so right now (perhaps you need this money for your retirement fund).
However, there are other ways you can help still.
You could help by becoming a mortgage guarantor.
As a mortgage guarantor, you’re basically saying that if your loved one, for whatever reason, can’t pay their mortgage anymore, you’ll step in and pay it for them.
You can do this by either offsetting your property, or a savings account, against their mortgage.
Similarly, you could consider releasing equity from your house to raise the money, but make sure you seek advice from a qualified professional first.
Speak to a mortgage adviser.
Overall, gifted deposits can take a huge weight off your shoulders and give you the chance you need to finally buy a house!
If you’ve accepted a gifted deposit, or perhaps you’re the one considering gifting money to help a loved one, feel free to get in touch with our team and we can answer any questions you might have about this process.
Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances.
The fee is up to 1%, but a typical fee is £495.