Last reviewed on 15th September 2023 by Martin Alexander (Mortgage Advisor)
Saving for a mortgage deposit can be difficult but fortunately, first-time buyers can get a mortgage with a gifted deposit. That being said, it’s important to take the correct steps to make sure your gifted deposit is acceptable to lenders.
If you wish to use a gifted deposit for a mortgage, lenders and solicitors have a legal duty to ensure that your deposit gift is credible. For instance, your gift can come from family savings but not a third-party loan. A deposit that is loaned and not gifted will be a red flag for most lenders.
- What is a gifted deposit?
- Are there any benefits to using a gifted deposit?
- Who can gift me a deposit for a mortgage?
- How to get a mortgage with a gifted deposit
- What if I need to repay my gifted deposit back?
- Can I use a guarantor instead of a gifted deposit?
- Are there any alternatives to using a gifted deposit?
- Are gifted deposits subject to tax?
What is a gifted deposit?
A gifted deposit is where all or part of your mortgage deposit is given to you, typically by a family member. You can either use the gift for your entire deposit, or you can add the gift to your own savings.
If a mortgage deposit is given to you as a loan, it doesn’t constitute a gift. If you have to pay the deposit back at any point, then this also doesn’t constitute a gift, as it becomes a loan.
It’s important that your deposit also has a clear paper trail. For instance, lenders and solicitors will need to see that the funds have come from a legitimate source. This is due to anti-money laundering regulations and is a legal procedure that won’t be overlooked.
Unclear evidence of your gift can halt your mortgage offer and delay your solicitors in completing the property transaction. Furthermore, it can also result in your mortgage application being declined. Having the right evidence is crucial in providing clarity to lenders that your deposit is a legitimate gift.
Are there any benefits to using a gifted deposit?
Being gifted a deposit has many benefits, such as:
- Receiving a gifted deposit can allow you to become a homeowner in situations where you may otherwise be declined
- Unlock access to better deals, as mortgage rates improve with larger deposits
- Using a larger deposit could save you more money each month
- You won’t have to pay your gifted deposit back, as it’s not a loan
- Receiving a gift doesn’t give anyone else legal rights to your property
Who can gift me a deposit for a mortgage?
Friends and family members can give you a deposit as a gift, but most lenders do prefer gifted deposits from family members, rather than friends. Parents and grandparents are almost always eligible to gift deposits, but friends and distant relatives could prove problematic.
How to get a mortgage with a gifted deposit
By following these simple steps, you can ensure that you’re approaching your mortgage in the best way possible. Using a gifted deposit isn’t a straightforward process. For instance, you’ll need to ensure your deposit itself meets a lender’s requirements before you’re assessed yourself.
Prove that your deposit is a gift
Your lender will require proof that your deposit is a gift and not a loan. This can be quite simple. A signed letter or document outlining that the deposit is a gift and not a loan is typically enough to satisfy lenders.
The signed document should clearly state that the deposit is not a loan and doesn’t need to be repaid. In addition, it should also state that the gift doesn’t grant your friend or family member any rights to the property. Your mortgage advisor can provide you with a document template if you’re still unsure.
What should my gifted deposit letter say?
Your gifted deposit letter needs to be in writing and will need to contain the following:
- A statement that the deposit is a gift
- The sum being gifted
- The name of the person receiving the gift
- Confirmation the gift is not to be repaid and won’t give the doner rights to the property
- The relationship between the donor and the buyer
- Include your lender’s name and confirm that the gift won’t affect the lender’s position
- The address of the property you wish to purchase
- The gift has come from a legitimate source such as savings
- Your doner is financially able to gift you a deposit
The document should be signed and dated. A witness will also need to sign and date the document.
What other documents will I have to provide?
The person gifting your mortgage deposit will need to provide personal documents to the lender.
- A photo ID, such as a driving licence or passport
- Proof of an address, such as a bank statement or utility bill
- Bank statements to check how the funds for the gift have accumulated
The reason they’ll need to provide such documents is to comply with anti-money laundering regulations. Your solicitor will also request similar documents.
What if I need to repay my gifted deposit back?
If your deposit needs to be repaid, then it is not a gift, it is a loan. If the deposit amount is loaned to you, then you’re likely to be rejected by a lender. It’s important to understand that as your deposit is being loaned to you, it also counts against your outstanding debt.
When lenders make mortgage assessments, they’ll calculate your current level of debt. This can include unpaid credit cards and outstanding financial arrangements. If your deposit is a loan, it really doesn’t help your application in any way. Nonetheless, there may still be some lenders you can approach. It simply depends on the rest of your criteria and the mortgage you’ve applied for.
If your deposit is a loan, it would also imply that your helper has some security over the property. This certainly isn’t good news for lenders. Lenders want to be sure that their funds are secure. Any other interested parties in the property can compromise a lender’s position.
Learn more: What can I use for a mortgage deposit?
Can I use a guarantor instead of a gifted deposit?
Rather than gifting you a deposit, your parents may be able to act as guarantors for your mortgage. What this means is, that they’ll act as a guarantee for the mortgage in the event payments aren’t made.
This gives lenders the power to pursue your guarantor if mortgage payments fall behind. Being a guarantor poses more risk than simply gifting you a deposit. This is why it’s recommended to get legal advice before agreeing to such arrangements.
Read more: Guarantor mortgages explained.
Are there any alternatives to using a gifted deposit?
You may find that there are better alternatives that can help you buy your first home. This is why it’s recommended to speak to an advisor who can assess your situation in greater detail.
Lenders vary in who they’ll lend to and how much they’ll lend. Applicants can be declined by one lender, only to be accepted by another. This can also have an effect on the best route towards getting a mortgage.
Are gifted deposits subject to tax?
Gifted deposits can have certain tax implications. For instance, a gift from parents or grandparents is classed as a ‘potentially exempt transfer’ in the tax world. This means that if the person who gifted you the deposit doesn’t die within the next seven years it won’t be counted towards inheritance tax (IHT). If they do die within seven years, then the gift would become a chargeable transfer and could count towards inheritance tax.
Each year you can accept a tax-free gift allowance of £3000. If you build this up over several years, you could use it for a mortgage deposit. What’s interesting is this wouldn’t count as a deposit gift and it wouldn’t be subject to IHT.
About the author
Martin is a senior mortgage advisor and has held a CeMAP qualification for over 15 years while also completing an MBA in Global Banking & Finance.