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What is a gifted deposit?
A gifted deposit is simply a deposit paid for by a third party, usually a close family member of the borrower. It reduces (or eliminates altogether) the amount that the borrower needs to put down for a deposit themselves.
A gifted deposit is given without any requirement to be paid back. If the family member expects to be repaid, this does not constitute a gift and instead is considered a loan.
A property developer or a builder can also offer a gifted deposit, in the form of a reduced property price.
What should I consider when accepting a gifted deposit?
Lenders will do their due diligence to make sure that the source of the gift is legitimate. This means that they have a number of requirements in accepting the money as a deposit. The person giving the gift will need to write a letter, confirming the following:
- The money is a gift and not a loan. They do not expect to be paid back at any point in the future, and the gift is completely unconditional.
- They understand that they have no stake in the property equity or any rights over the property.
- The exact amount being gifted.
- The address of the property being purchased with the gifted deposit
- How the funds were acquired (usually via savings)
- Confirmation that the person gifting the deposit is financially stable, can afford to give you the gift, and are not depriving themselves of income.
The letter needs to be signed and dated. A third party is required to witness the signing and dating, and will then need to sign and date the letter themselves.
Aside from the letter, the person gifting the deposit will need to provide proof of how they acquired the money. Bank statements showing regular monthly deposits into a savings account will generally fulfil this need.
They will also need to provide evidence of identity, such as a passport and a bank statement or bill with proof of address. This is so that the lender can meet their anti-money laundering requirements.
What happens if I need to pay back the deposit?
If the person who offers to pay for your deposit requires you to pay it back in the future, this is not a gift, it is a loan. When applying for a mortgage, an applicant needs to declare all of their current loans and outstanding debt (such as credit cards) and this would be included as part of that declaration. For this reason, it could actually make it more difficult to obtain a mortgage with a loaned deposit, as you will be applying as a person with a significant amount of existing debt. Lenders may also get nervous about the person laying claim to any part of the property themselves, which can muddy the waters in who owns the property and who is taking on the risk.
If a family member wants to help you out without being out of pocket themselves, you may wish to consider guarantor mortgages.
Is there any limit to the amount that can be gifted for a deposit?
No. You can be gifted as much or as little as you agree with your donor.
However, there are tax implications to a large gift. If the donor were to pass away within seven years of the gift being given, the gift may be subject to inheritance tax. This depends on the size of the estate of the donor.
There are some situations where the applicant will be expected to invest some of their own funds in a property, irrespective of the size of the gift. For example, if you have adverse credit, the lender will want to see that you are confident enough in taking on a mortgage to invest in it yourself. If the property is of a non-standard construction (such as timber framed or with a non-slate roof) this is typically seen as more risk to the lender, and again, they will expect you to negate some of this risk by investing in the property yourself. In both of these situations, a 5% contribution from the applicant is typical, although it can be higher.
What is a builder gifted deposit?
A builder gifted deposit is where a developer offers to sell you a property at a discounted price. For example, if the property is valued at £200,000, and they offer to sell it to you for £175,000, the £25,000 variance can act as a deposit. This is often seen with new builds, where the developer uses this system to nudge buyers to complete the sale quickly.
New builds are generally seen as a higher risk for the lender as they have no history on the property. They may place a limit on the LTV (loan-to-value ratio) that they are willing to lend, and ask that the borrower invests some of their own money on top of the gifted deposit.
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