First-Time Buyer with a Gifted Deposit? Here’s what You Need to Know
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. You should always seek professional advice from an appropriately qualified adviser.
All contents are based on our understanding of current legislation, which is subject to change, any information provided here is only correct at the time of posting.
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For many first-time homebuyers, the dream of owning a home can feel out of reach, largely due to the challenge of saving for a mortgage deposit. Rising living costs, rent, student loans, and general day-to-day expenses make it difficult to amass the substantial sum often required. In this scenario, many prospective buyers turn to their families for assistance, leading to what is commonly referred to as "the Bank of Mum and Dad." One popular way for parents or other family members to help is through a gifted deposit. But what exactly is a gifted deposit, how do lenders view it, and what are the pros and cons of using one?
The Challenge of Saving for a Deposit
In recent years, the housing market has seen significant growth in property prices, while wages have struggled to keep up. According to a report by the UK Office for National Statistics, house prices have risen by an average of 5-6% per year, while wage growth has been much slower. As a result, the average deposit required to purchase a property has increased, leaving many first-time buyers unable to save enough on their own.
This gap between savings and the deposit required is where family support often comes into play. Parents, grandparents, or even close relatives may step in to help by providing what is known as a gifted deposit.
What is a Gifted Deposit?
A gifted deposit is a sum of money given to a homebuyer by a family member, friend, or sometimes even an employer, to help them meet the deposit requirements for a mortgage. This money is a gift, meaning it does not need to be repaid. The individual providing the gift must clearly state that it is not a loan and that they have no financial interest in the property.
How Do Lenders View Gifted Deposits?
Lenders are generally open to accepting gifted deposits, but they do have specific requirements and procedures in place to ensure everything is above board. The key concern for lenders is to verify that the money being gifted does not create any additional financial obligations for the borrower. Therefore, they will require a formal letter from the person providing the gift, often referred to as a "gifted deposit letter."
This letter must state:
- The amount of money being gifted.
- Confirmation that the money is a gift and not a loan.
- Confirmation that the person providing the gift has no financial interest in the property.
- The relationship between the person gifting the money and the buyer.
Lenders may also ask for proof of where the money has come from to comply with anti-money laundering regulations. This could involve providing bank statements or other financial documentation.
It's also important to note that not all lenders have the same criteria for accepting gifted deposits. Some may have restrictions on who can provide the gift (e.g., limiting it to close family members) or on the amount that can be gifted. Therefore, it's crucial to check with a mortgage adviser or lender before relying on a gifted deposit.
Pros of Using a Gifted Deposit
1. Helps Secure a Home Sooner: One of the most significant advantages of a gifted deposit is that it can help you secure a home sooner than if you were relying solely on your savings. This is especially important in a rising property market, where delaying a purchase could mean paying more for a property in the future.
2. Potential for Better Mortgage Rates: By increasing your deposit, a gifted deposit can help you access better mortgage rates. Lenders often offer more favourable terms for buyers with larger deposits because it reduces their risk.
3. Avoids the Need for a Loan: Unlike a loan from a family member or friend, a gifted deposit doesn't need to be repaid. This reduces financial strain on the buyer and avoids potential complications or misunderstandings down the line.
Cons of Using a Gifted Deposit
1. Potential Strain on Family Relationships: While a gifted deposit is a generous gesture, it can sometimes lead to tensions or expectations within families. It's important to have open and honest discussions about the gift to ensure everyone is on the same page.
2. Impact on Inheritance Planning: For parents or relatives providing a gifted deposit, it's essential to consider the impact on their inheritance planning. Giving away a significant sum of money could affect their financial security in the future or reduce the amount available to other beneficiaries.
3. Legal Implications: In some cases, gifted deposits can have legal implications, particularly if the person providing the gift changes their mind or if there are disputes after the purchase. To protect all parties, it's advisable to seek legal advice and ensure everything is documented properly.
4. Lender Restrictions: As mentioned earlier, not all lenders accept gifted deposits from everyone. Some may have strict criteria on who can provide a gift, which could limit your options when choosing a mortgage. It's essential to clarify this with your lender or mortgage broker early in the process.
Conclusion
A gifted deposit can be a lifeline for many first-time buyers struggling to save enough for a mortgage deposit. It can help secure a home sooner, improve mortgage terms, and reduce financial stress. However, it's essential to approach the process carefully, considering the potential impact on family relationships, inheritance planning, and legal obligations.
Before accepting or providing a gifted deposit, ensure that all parties understand the implications, and consult with your adviser to navigate the requirements of lenders. With the right approach, a gifted deposit can be a valuable tool in making homeownership a reality for many first-time buyers.