Getting on the property ladder is hard work, and with property houses at an all-time high, first-time buyers need to save for a bigger deposit than ever before. Not everyone has the means to save for a deposit, which is why some people will choose to support their friends and family with a gifted house deposit.
When you are looking to get on the property ladder, you need a deposit to secure a mortgage. Lenders will typically want to see a deposit of between 5-25% of the value of the property. If you don’t have this kind of money saved up, you could ask a friend or family member for the money.
Parents, grandparents and even friends can offer some of all of the deposit to make it possible for their loved ones to get on the property ladder. But this is a very tricky area, and it could impact your eligibility for a mortgage.
Under UK tax law, you can’t just give your money away. Family members are allowed to give you as much money as they like, but if they pass away within seven years of the gift, you will be subject to inheritance tax on the amount.
A gifted deposit should not be used in place of a loan. The giver should have no intention of getting the money back and it should be given freely. A gifted deposit is a large sum of money when you consider that the average house price is £237,963 and the average deposit amount is 10%. This means that you’ll need around £24,000 to secure a mortgage.
As part of the mortgage application process, you have to let your lender know where your money is coming from. This is part of their anti-laundering checks. While anyone can give you the money, lenders prefer it when it is a close relative. Some may even specify that it must be a parent.
If you aren’t sure if a relative is about to give you the money for your deposit, speak to a mortgage broker or your mortgage provider to find out more. The criteria will vary by lender, and each one will have their own procedures and requirements. Most lenders will ask for a declaration from the giver that the money is a gift. This will typically need to include:
Your solicitor will help to ensure this letter is above board before you move forward with your application.
The person giving you the money will also need to provide proof of funds, usually in the form of bank statements. If the money has come from a deceased family member’s estate, you might need a copy of the will. And if the money has been saved over years, the giver might need to provide proof of deposits, to satisfy anti-laundering checks.
And finally, the person giving the money will need to provide photo-ID and two forms of proof of address.
Accepting a large financial gift from someone overseas will be even more complicated. All documents will need to be translated and notarised, which can slow down the process. The anti-laundering checks will become much more stringent, so be prepared to provide proof of the origins of the funds.
For the purposes of anti-money laundering checks, a gifted deposit will be classed as a kind of “living inheritance”. This will be tax-free provided the gift giver is still alive, but if they pass away with seven years of giving you the money, this will be classed as an inheritance.
While there is a risk this could happen with anyone at any age, the risk increases when you accept a gift from an elderly relative. The standard inheritance tax rate is 40% which is only charged on the value of your inheritance over your tax-free threshold.
If your parents are unable to provide a lump sum, there are other ways they can help their children onto the property ladder. There are 100% deposits available for student properties, and these are secured against the parent’s property. This will allow the student to start paying towards a mortgage by letting out the property to their friends.
After graduation, they can keep the property and let it out to future students. The mortgage will switch to a traditional mortgage after three or five years, once the student graduates. After this time, the parent will no longer need to act as a guarantor.
This type of mortgage is not limited to students and you could act as a guarantor using your home or your savings as collateral. If you decide to become a guarantor, you will be responsible for mortgage payments if the homeowner cannot keep up with them, so it’s important to head into this type of arrangement with a plan.
If the borrower cannot afford a full deposit, you could make it a condition of the guarantor arrangement that they save an emergency fund to cover mortgage payments for a fixed period.
As with all guarantors and gifted deposit mortgages, it’s important to remember that you don’t have any financial claim over the home. If your relationship sours, you will have no right to claim your money back or stop being the guarantor, so think carefully before entering into this type of arrangement. If your own home or life savings is on the line, think carefully about how you want to proceed.
If you need any further advice, please see free to contact Niche Mortgages.