A gifted deposit is when someone, usually a family member, gives some or all of the money necessary for a home buyer to pay for their deposit. In order to do this, the person giving the gift must provide a gifted deposit letter for the mortgage lender. Here we examine how to write a gifted deposit letter.
What is a gifted deposit letter?
The cost of a home is a large sum of money. It is expected that most home buyers will require a mortgage to pay for their home. The mortgage is a legal agreement between the home buyer and their bank or building society etc, who lends the money at interest in exchange for taking title of the debtor’s property, with the condition that the conveyance of title becomes void upon the payment of the debt. In order to qualify for a mortgage you’ll be expected to pay a deposit, which is a percentage of the overall value of the property you wish to buy. The cost of this will depend on the value of the property and market conditions at the time of buying. A gifted deposit can help buyers fulfil the deposit amount with help from a person, who is usually a family member, who may have more capital available. Most mortgage lenders will allow a gift to form some or all of your deposit. However they need to see evidence that the money has been obtained lawfully and that there is no obligation to pay back this sum, which would affect your lend-worthiness. They will also want to know your relationship to the person who is giving the money and if they can afford to give it. The purpose of the gifted deposit letter is for the gift giver to confirm these details.
Who is eligible to give a gifted deposit?
A lender will look at the rest of the home buyer’s finances to assess whether you can afford to repay a mortgage. So you’ll need to be able to reassure your donor that you have sufficiently prepared for your new mortgage. Some lenders have strict rules about who can give a gifted deposit, so check that your donor is eligible with the relevant lender before the buyer makes their application. Usually included are:
- Parents, step-parents, parents-in-law
- Siblings, half-siblings, step-siblings, brothers and sisters-in-law
- Grandparents, step-grandparents
- Aunts/uncles (related by blood)
- Partners living with applicant
- Applicants’ children and step-children
- Applicants’ sons and daughters-in-law
- Applicant’s adopted children
- The people who usually can’t give a deposit:
- Family friend
- Your landlord
- An aunt or uncle who is not your blood relative
- Foster/guardian children
What conditions are there?
As always, check the specific conditions with your lender. But we’ll outline the most common ones that you should be aware of. The donor of the gifted deposit must agree to have no claim over the property. As such they will not be referred to on the mortgage or the deeds of the property. The money must be given freely and it must be agreed that the money is a gift, meaning that it is not expected to be paid back in any way. There is no limit on the size of a gifted deposit, unless the lender specifies otherwise. If the gifted deposit is the part of an inheritance, you may need to provide proof with a copy of the will.
Can a buyer receive multiple donations?
In most cases yes. A gifted deposit can make up some or all of the total deposit amount. If the amount you give does not fulfil the total deposit amount, you will need to make up the remainder by other means usually with your own savings. Some lenders will accept multiple financial donors. In which case each donor will need to submit a gifted deposit letter, according to these guidelines, with their corresponding information.
How to write a gifted deposit letter
A gifted deposit letter does not need to be in fancy language, it simply needs to state certain information and be clearly signed by both parties in front of an independent witness.
It needs to include:
- Your full name
- Full name of the donor
- Your relationship to one another
- Total amount given
- A statement that it is a gift
- A statement that the gift has no commercial interest
- Confirmation that the donor has no stake in the property
- Confirmation that the donor can afford to give the money
The letter needs to be signed in front of an independent witness. The witness cannot be a family member or anyone who benefits from the gift. However they can be a friend, colleague or neighbour for example. They need to see the donor and the home buyer sign the letter and then sign themselves, next to printed names and a record of the date. This letter should then be given to your solicitor, who will submit this with your mortgage application.
The gift donor will also need to provide the following personal documents to comply with anti-money laundering laws:
- Proof of address
- Bank statements
- Photo ID
Inheritance tax could be owed on the deposit if the donor passes away within seven years of the money being gifted. This will depend on how big their estate is at the time they pass away. Alternatively you can agree to receive the money in instalments of £3,000 each year because this is the limit under which there is no tax on cash gifts.
Advantages and disadvantages
Advantages of a gifted deposit are buying a property much sooner than you could perhaps otherwise without help. The gift also allows you to borrow less on your mortgage, because your deposit is boosted by the gift. This means getting a lower mortgage rate.
The only real disadvantage is that it may be upsetting if you later fall out with the person who has given you the gift. However they cannot reclaim the money by law, because it is a confirmed gift.
Alternatives to gifted deposit
If for whatever reason a gifted deposit is not suitable there are some alternatives.
Interest free loan
You could consider entering an agreement to receive an interest free loan from a family member. However, it should be declared to mortgage lenders who may treat it in the same way as they would a personal loan. Which may impact on your ability to afford the mortgage. Otherwise you could nominate a parent (or grandparent) as your mortgage guarantor. This means they ‘guarantee’ your mortgage should you fall into financial difficulties and be unable to pay. Guarantors need to carefully consider whether this is suitable and ideally get independent legal advice, to ensure they can afford the repayments should the worst happen.
A lifetime ISA is a tax-efficient government scheme to help people save for their first property – with bonuses paid on savings. If the ISA is not used towards a first home purchase the cash can be used in retirement.
You could consider buying a home with a partner, friend or even more than one friend. This can help boost your purchasing power because the earnings of each of the parties will be taken into consideration by the lender. There are lenders who will lend to more than two people on the same mortgage, subject to alternative terms and conditions and you will need sound legal advice. You must ensure you feel confident being financially linked to the other people in the mortgage as this is a big commitment.
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