Most properties cost tens of thousands of pounds and as lenders expect a chunk of the overall home value as a deposit, many first-time buyers struggle to raise the funds needed.
This is where a gifted deposit can come in handy. If you have family members or friends willing to give you the money needed for your deposit, you may be able to buy your own home sooner.
When you apply for a mortgage, you will need to pay a deposit towards the purchase. The amount you pay upfront is used to pay towards the cost of the property. Depending on you’re loan to value, this is usually between 5% – 25% of the property value.
What is a gifted deposit?
A gifted deposit is an amount of money given to a prospective home buyer by a friend or member of the family (such as parents, stepparents, or grandparents). The money given as a gift can be used as part of a deposit or it can be used as the total amount needed if it meets the lender’s requirements.
In our experience, we have found that if you do have your deposit gifted by a friend, it is much harder to find a lender to accept it. You can accept a friend’s gift but you may need to jump through more hoops to satisfy the lender’s requirements.
To learn more about gifted deposits and the ins and outs of a mortgage deposit gift letter, keep reading our useful guide.
You may also like to know – How much deposit is needed to buy a house?
How do gifted deposits work?
The money given to you by your chosen individual is a gift.
As such, you shouldn’t be expected to pay it back to the person as it’s not a loan, and the person giving you the gift will have no ties to the house you are buying.
The majority of mortgage lenders accept gifted deposits provided there is a gifted deposit letter to back up the giver’s intent. Some lenders will favour close family members over friends or distant relatives but this isn’t always the case. A mortgage broker can point you to the right lender for your situation and also help you with what to put in the gift letter, so contact our team for advice and support.
Is the gifted deposit process complicated?
No, it’s a rather straightforward process so there isn’t anything too complicated to consider.
The typical process is as follows.
Save up what you can for the deposit amount
If you are able to raise funds for your deposit, then do so. This way, the giver won’t have to give you the full amount needed for the deposit (unless they offer this to you).
Arrange an amount with your donor
Speak to the person giving you the gift and let them know how much money you need. They may be willing to give you some or all of the money needed, depending on how much you have saved up already. If they aren’t able to give you the full amount, continue saving until you have enough for the deposit.
Provide the mortgage gift letter
Your mortgage lender will need to see the gifted deposit letter as evidence of the gift being given to you. In some cases, a mortgage lender will ask you to fill in a gifted deposit form as an alternative to the letter.
Wait on the lender’s decision
As we suggested, most mortgage lenders will accept a mortgage deposit gift letter, so provided you and the donor have the funds needed for the total mortgage deposit, your mortgage application should be successful provided you meet the rest of the lender’s criteria.
How to write a gifted deposit letter
The person giving the gift should prepare the letter for the mortgage lender. It needs to be signed and dated by them and it should also be signed by a witness.
The letter should contain the following information.
Name of the donor, the donor’s relationship to the home buyer, and property address
The letter should clearly state the name of the donor, their relationship to the property buyer, and the address of the property that the buyer is looking to move into.
This is the amount that the donor is willing to offer as the gifted deposit. A declaration should be made that this is a gift and not a loan and that there is no expectation of repayment.
The reason for the gift
The donor needs to declare the reasons why they are giving the property buyer the gift. One such reason would be “to help (name of the buyer) buy their first home.”
Confirmation of solvency
The donor needs to declare that they are financially solvent and that they have no reason to assume they might become bankrupt in the future.
Confirmation that the donor knows they have no stake in the property
The mortgage lender will expect written confirmation from the donor stating that they have no stake in the property that they are providing the deposit for.
Does the donor need to provide anything else?
Yes, the person gifting the money will need to provide several personal documents, including proof of their finances, such as a bank statement, a photo ID, such as a driving license, and two proofs of address, such as utility bills.
What are the pros and cons of gifted deposits?
If you intend on using a gifted deposit for your home purchase, it’s wise to consider the pros and cons first.
- You will be able to get on the property ladder sooner if you are in receipt of a deposit that has been gifted and a letter signed by your donor.
- You will have less to pay on the deposit if you are in receipt of gifted funds.
- If you are able to add your own savings to the deposit gift, you may be eligible for a larger deposit that gives you access to better mortgage deals with lower mortgage rates and lower mortgage payments.
- You shouldn’t have to repay the donor the amount gifted to you. The only exemption is if the gift is donated by a family member and it is subjected to a family trust arrangement or second charge. Repayment of the charge is the only condition you will need to abide by if you sell your property.
- If the donor passes away within seven years of giving you the deposit, it would become a chargeable transfer and you may have to pay inheritance tax on the amount that was given to you. Inheritance tax won’t apply if they don’t die within that seven years.
- If you fall out with the person who gave you money for the mortgage deposit, they may ask for it back. This shouldn’t be a major problem for you as they lose legal rights to the money when the relevant paperwork is completed at the time of the deposit. However, there might still be friction between you and the donor if they later resent giving you the gift.
Gifted deposits mortgage letter template
Most lenders have their own mortgage deposit gift letters. However, some do not have a template and advice on how they would like the proof of deposit.
Below we have collated a selection of templates and forms sourced from a handful of the top lenders in the UK.
To ensure the gift letter is completed correctly, ask your mortgage advisor how your lender requires your proof of deposit gift.
Nationwide Building Society mortgage gifted deposit letter template
NatWest mortgage gifted deposit letter template
You can download NatWest’s template here
Halifax mortgage gifted deposit letter template
You can download Halifax’s template here
Virgin mortgage gifted deposit letter template
You can download Virgin’s template here
TSB mortgage gifted deposit letter template
You can download TSB’s template here
Platform mortgage gifted deposit letter template
Leeds Building Society mortgage gifted deposit letter template
How can a mortgage broker help?
If you’re looking to get your feet on the property ladder, we are here to help you get your mortgage. After getting to know you and finding out how much you have available for your mortgage deposit, we will search the mortgage market and use our mortgage calculators to find you a deal with the lowest monthly payments.
If you’re using a gifted deposit, we will advise you on the lender’s requirements for the gifted letter so you can relay this information back to the gift giver.
We will also talk to you about inheritance tax as well as the general tax implications of a gifted deposit and other impartial financial advice to help you make the right decision before using gifted money as a deposit. If you do decide to use the money gifted to you, we will then advise you on the paperwork needed before you make your mortgage application, such as the bank statements needed as proof of the donor’s funds.
Our team will do all this and more for FREE, so get in touch with us if you would like to know more and benefit from the advice and support that we can give to you.