For most people in the UK, house prices can be a difficult thing to overcome and can take years to fully save up, even just for a deposit. A great way to navigate this is with the use of gifted deposits.
In this blog, we are going to be discussing what gifted deposits are, how they work and the benefits and drawbacks of them so that you can weigh up whether this is the route you want to take.
What Are Gifted Deposits?
As the name suggests, a gifted deposit is simply a gifted sum of money that is used to cover some of, if not all, of a deposit for a mortgage. These gifts are typically given by parents, grandparents or other loved ones.
Gifted deposits must only be given by someone who does not have a stake in gaining anything from the transaction themselves. This must be done solely to help out as a gift and not for any other nefarious purposes.
How Do Gifted Deposits Work?
Gifted deposits must be declared by the gift giver through a letter of declaration. This should state the following:
- Names and addresses of the giver and the recipient
- Their relationship with you
- The amount gifted
- Confirmation it’s a gift, not a loan
- A statement explaining that the giver has no stake in the property
The gift-giver may also be required to present proof of funds, which could be in the form of bank statements, ID or something else that can be used to authenticate the identity and funds of the gift-giver.
It is also important to note that both your lender and conveyancer should be informed of the gift early in the process.
The Pros and Cons
Gifted deposits have their fair share of pros and cons. Here are some of the most important things you should be aware of:
The Benefits of Gifted Deposits
Gifted deposits can be a great help when buying a home, providing several benefits to potential buyers.
Getting financial help from family or close relatives can strengthen a buyer’s situation and potentially lead to better mortgage options.
Access to Better Mortgage Rates
When buyers make a bigger deposit, they often get better mortgage interest rates. Lenders see loans with a higher deposit compared to the property’s value as less risky, which can lead to lower interest rates.
This can save thousands of pounds over the course of the mortgage, making gifted deposits a helpful way to improve your financial situation.
Lower Monthly Payments
A bigger deposit usually means you’ll need to borrow less money, which results in lower monthly payments. This makes it easier for homeowners to handle their finances and gives more room to plan and cover other costs.
Improved Affordability
Gifted deposits can make it easier for buyers to afford a home by helping them reach the necessary deposit amount.
This can improve their chances of qualifying for a mortgage and give them access to properties that might have been difficult to afford without extra financial help.
The Problems with Gifted Deposits
While gifted deposits offer clear advantages, they can also come with some difficulties. Things like tax issues or the emotional aspects of depending on family are important to consider. Being aware of these possible challenges can help you make a well-informed choice.
Potential Tax Implications
Giving someone a gift of deposits might have tax implications, like inheritance tax, depending on how much and when the gift is made.
Buyers and their families should consult a professional to make sure they follow tax rules and prevent any surprising costs later on.
Additional Paperwork
Lenders often ask for proof of the gifted deposit, such as a signed letter from the person giving the money, confirming it is a gift and not a loan. This can involve some extra paperwork and might cause delays in getting your mortgage approved if not managed smoothly.
Reliance on Family
Taking a gifted deposit can sometimes make family members feel overly responsible or dependent, which might cause tension or lead to disagreements later on.
It’s important to talk openly and honestly with everyone involved to make sure everyone understands and agrees on the arrangement.
Pros and Cons Summary
Weighing up the pros and cons is entirely up to you. If you feel that this would be worthwhile, then you are more than welcome to accept a gifted deposit or place one down yourself.
| Pros | Cons |
|---|---|
| Faster Homeownership | Potential Tax Implications |
| Access to Better Mortgage Rates | Less Acceptance from Lenders |
| Lower Monthly Payments | Additional Paperwork |
| No Repayment | Restricted Mortgage Options |
| Improved Affordability | Reliance on Family |
Weighing up these pros and cons is entirely up to you. If you feel that this would be worthwhile, then you are more than welcome to accept a gifted deposit or place one down yourself.
How Do Gifted Deposits Affect My Mortgage?
Your mortgage can be affected significantly by a gifted deposit but not necessarily in a negative way. Here are some of the main factors to consider:
- Increased eligibility: Many mortgage lenders prioritise applications with gifted deposits.
- Improved affordability: A gifted deposit can lower the loan amount, resulting in reduced monthly payments and improved affordability for lenders.
- Lower risk for lenders: A larger initial investment, including gifted funds, reduces repayment risk in lenders’ eyes.
- Access to better mortgage deals: A larger gift can help you qualify for lower interest-rate mortgages.
- Increased chances of approval: A gifted deposit lowers the loan-to-value (LTV) ratio, enhancing your application’s appeal to lenders.
What Proof Will I Need to Provide?
As with any kind of mortgage, there is always a need for documentation and one of the most important is making sure that you have adequate paperwork to prove your ID and income:
Proof of ID
Proof of ID is important for the simple reason that lenders will need to verify that it is really you who wants to lend and not a fraudster. Lenders will need to see proof of ID to make sure that they comply with anti-money laundering regulations.
Proof of Funds
Proof of funds are important for several reasons, the most obvious of which is that it makes sure that you are able to pay back consistent mortgage payments. This will simply verify your financial status to make sure that you are a trustworthy person to lend to.
Key Takeaways
- Gifted deposits are gifted sums of money given to help pay off a mortgage deposit.
- The gift giver must write a letter of declaration to state that they have no stake in the property.
- Gifted deposits should not negatively impact your mortgage.
- You will need to provide both proof of ID and proof of funds to acquire your mortgage.
Can JG Mortgage Services Help?
We are a team of mortgage brokers who are dedicated to helping people across the country with their mortgages. We can provide advice and handle paperwork when you are buying your home to make sure that you have little to worry about.
If you have a gifted deposit and are struggling to find a lender to accept, or perhaps you simply want additional advice, please do not hesitate to get in touch with us today and speak to a member of our team. We also have a selection of other services that we are happy to help you with should you need us.
