Whether you’re a first-time homebuyer or a seasoned one, the cost of property can be overwhelming. For the most part, you will need to pay a certain amount of money upfront to make your purchase in the form of a mortgage deposit.
Saving for such deposits can be challenging, especially for first-time homebuyers. This is where gifted deposits come into play. A gifted deposit refers to a sum of money that has been given to you by someone else – usually family – to aid with the funds for your mortgage deposit.
Unlike loans, gifted deposits are given with the understanding that the money doesn’t need to be repaid. Following the agreement of a gifted deposit, the person who has given the funds will have no rights or legal interest in the property being purchased.
Why Gifted Deposits Can be Beneficial for Your Mortgage
In general, mortgage lenders will require a deposit ranging from 5% to 20% of the property’s purchase price. The minimum deposit you will need goes back to your lender, but the bigger your deposit, the better it is for you in the long run.
A bigger mortgage deposit means that you’ve paid a larger sum for your house at the start, so you will need to borrow less and will have cheaper monthly mortgage repayments. Moreover, you will have the opportunity to explore a wider choice of mortgage products.
There’s no denying that a gifted deposit is truly a blessing in your home buying journey. It can help you secure your dream house, and even help make your monthly repayments more affordable.
However, gifted deposits don’t work as simple as a gift in the form of a money transfer. The persisting question, then, is how to apply gifted deposits to your plans?
How Do Gifted Deposits Work for a Mortgage?
When you’re a first-time home buyer, saving up for a deposit can take months, if not years. Therefore, you can take advantage of getting a gifted deposit for a mortgage with the help of your parents or family.
It will be in your best interest to have a thorough discussion with your donor to be clear of all the details that might be overlooked. First and foremost, you will need to ascertain the bond in your relationship and avoid the risk of falling out.
You should also gauge the financial power of your donor on the possibility of them running into financial difficulties. It is worth knowing that gifted deposits could be subject to inheritance tax, which could happen if your donor passes away within seven years.
In these cases, you can lead the discussion to go over the alternatives that may not burden the donor as much, such as an interest-free loan, being a mortgage guarantor, or considering other deposit savings plans.
Once everything is settled, both you and your donor are ready for the next step, which is to apply for a mortgage with a gifted deposit. In this section, we will share a simple guide on a gifted deposit application.
1. Create a Gifted Deposit Letter for a Mortgage
Whoever provides the gifted deposit for your mortgage will need to create a gifted deposit letter as a courtesy to the bank as your lender. In essence, there are several necessary information that your letter should include, as follows:
- The full names of all parties involved
- The relationship between person gifting and receiving (don’t forget to include the address of the desired property)
- The total amount of the gifted deposit along with the reason for the gift
- A statement highlighting that the gifted deposit is given to you with no commercial interest
- Confirmation that they will have no stake in the property you’re looking to buy
- Confirmation and consent that the amount given is feasible for them to provide.
The content of the letter should specify the recipient clearly, especially in the case where the gifted deposit is only meant for you and not your partner.
Then, the gifted deposit letter must be signed by a third party as an independent witness and submitted as a part of your mortgage application requirements. Note that the witness cannot be a family member or someone who benefits from the transaction.
2. Provide a Proof of ID From the Person Gifting the Deposits
On top of discussing with a qualified mortgage broker, transactions related to properties also need to include a solicitor. There may be some criteria on who can aid you with a gifted deposit.
Most mortgage lenders prefer that the source of the gifted deposit is from an immediate relative, such as a parent, grandparent, sibling, or in some cases, partner. Be sure to disclose your plans if you’re planning to complete your transaction with a gifted deposit since some lenders might not accept gifted deposits at all.
When it comes to the next step for your gifted deposit application, your solicitor will need proof of the gifters identification along with the letter. Typically, the bank will need a copy of ID such as a passport or driving license.
Depending on the bank’s policy, you may also need an additional proof of identification to fulfil this requirement. The latter may vary, but typically they may ask for a copy of a bank statement or a letter from HMRC.
3. Get proof of funds
Following the Anti-Money Laundering regulations in the UK, you will also be required to show proof of the fund source. Your donor may have to provide evidence to prove that the money they are providing is compliant with the regulations. On top of that, they may also need documents that demonstrate their financial condition to further confirm the gifted deposit letter.
Mortgage applications, with or without a gifted deposit, can be overwhelming. This is no easy feat to accomplish, nor is this going to be a fast process. The journey from savings, researching, planning, and dealing with legal documents can be taxing. As a matter of fact, the approval of your application is only the beginning.
When it comes to the next chapter, don’t stress yourself out with the moving process as Which Removals can help you with it.