A gifted deposit is a financial contribution made by a family member or friend to help with the deposit on a home purchase. Gifted deposits can be a big help if you’re struggling to save up enough money for a deposit on your own. They can help you reach the minimum deposit threshold required by lenders, which often allows you to borrow a larger amount.
How Does Gifting A Deposit Work?
The process of gifting a deposit comes with specific requirements to ensure you can use it properly. Typically, a letter must be signed between the donor and the homebuyer. This becomes a legal document that confirms that the money is a gift and doesn’t need to be paid back.
A Gifted Deposit Letter Usually Includes:
- Your name and address
- Donor’s name and address
- The relationship between you and the donor
- Amount being gifted
- Confirmation it’s a gift and won’t be repaid
- Confirmation they won’t have a stake in the property
- Potential proof of their financial stability (bank statements)
The donor may also need to provide a bank statement to verify the source of the money, which safeguards against money laundering.
How Much Money Can Be Gifted?
There isn’t a universally set limit on how much money can be gifted in a house deposit. It generally depends on the specific mortgage lender and their policies and often there is no limit. Lenders assess your ability to repay the mortgage based on your income and existing debts. A gifted deposit on top of what you’ve saved can strengthen your application by reducing the amount you need to borrow.
How Does A Gifted Deposit Affect Your Mortgage?
In most cases, a gifted deposit won’t impact your affordability, as you won’t need to pay it back. However, keep in mind that if the donor is not a direct family member, the lender may take this into account.
With a gifted deposit, you put down a larger down payment, reducing the amount you need to borrow. This leads to a lower loan-to-value (LTV), which makes your application more attractive to lenders and increases your chances of getting approved.
Better still, by reducing the loan amount with a gifted deposit, you’ll have a smaller monthly mortgage payment. This can significantly improve your affordability, allowing you to potentially qualify for a larger mortgage/more expensive property.
Advantages Of A Gifted Deposit
There are a number of advantages to using a gifted deposit if you’re in the position to do so. These include:
- Easier/quicker entry onto the property ladder: A gifted deposit can significantly reduce the amount you need to dedicate to saving a deposit by yourself, allowing you to buy a property sooner.
- Access to more competitive mortgages: As a gifted deposit allows you to raise a larger amount, you might qualify for mortgages with lower interest rates. This saves you money in the long run on your monthly mortgage repayments.
- Borrow a larger amount: A bigger deposit allows you to borrow more from the lender, potentially giving you more options to choose from property-wise.
- Improves affordability: A larger deposit leads to smaller monthly mortgage payments, making homeownership more affordable.
Disadvantages Of A Gifted Deposit
There are a number of disadvantages to using a gifted deposit. These include:
- Family strain: Accepting a large sum of money can create a sense of obligation or pressure on the recipient. Discuss expectations openly with the giver to avoid any misunderstandings.
- Mortgage restrictions: Some lenders may have restrictions on the source or amount of a gifted deposit. Always check with your chosen lender about their specific requirements.
- Financial responsibility: Even though you aren’t directly repaying the gift, you’ll still be responsible for the mortgage repayments. Make sure you can comfortably afford these monthly payments before proceeding.
What Are The Tax Implications?
While receiving a gifted deposit in the UK usually doesn’t incur any immediate tax charges, if the gift giver passes away within seven years, the gifted amount may be counted towards their estate for inheritance tax purposes. If this is something you’re concerned about, contact a tax specialist or financial adviser, who are qualified to offer guidance on this topic.
What To Do Next
A gifted deposit can be a valuable way to step onto the property ladder, but it’s essential to carefully consider the pros and cons to ensure it aligns with your financial situation. Open communication with the person providing the gift is also key to ensuring mutual understanding.
While gifted deposits present a great opportunity for first-time buyers, it’s crucial to follow the correct procedures to avoid any legal or financial complications. If you need guidance on navigating gifted deposits, our expert advisers are here to help.
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