Everything you need to know about gift deposits | Citrus North
Saving a sufficient deposit to purchase a house is one of the most significant obstacles facing first-time buyers.
With the average UK house price currently at £260,000, even the 5% minimum deposit requirement comes to a whopping £13,000. And that’s before real estate taxes and fees are included.
Saving such a quantity of money is just unattainable for the majority of people. And it is for this reason that a rising number of parents provide financial assistance to their children in the form of given deposits.
Here is all you need to know about how they operate.
What is the definition of a gifted deposit?
A gifting deposit is simply money provided to a homebuyer to assist them in making a purchase. The money may represent a portion of the deposit or the whole amount. However, it is critical that the money be a gift, not a loan such as Citrus North Loans.
As such, the money is not obligated to be returned, and the donor has no legal rights or interests in the property being acquired.
Obtaining a mortgage with the assistance of a donated deposit
With many first-time buyers unable to save a sufficient deposit, donated deposits may assist in expediting the homeownership process.
At the absolute least, mortgage lenders need a 5% down payment, but the more you save, the more likely you are to acquire a reasonable mortgage rate. Additionally, a greater deposit implies you will not need as much borrowing, resulting in lower mortgage repayments.
There is no such thing as a ‘gifted deposit mortgage.’ You will have the same access to mortgage offers as the rest of the population. However, by increasing your deposit from 5% to 10% or 10% to 20%, the number of mortgages accessible to you will increase.
Who is eligible to receive a mortgage deposit as a gift?
Lenders, on the other hand, are not obligated to accept gifts from mortgage applicants. And those who do embrace them often impose their own restrictions on their usage and distribution.
Lenders are often more receptive when the money is given by a direct relative, such as a parent, sibling, or grandmother. They are often more circumspect if the money is presented by a distant family, such as aunts and uncles, or by an unconnected third party.
If the money comes from a friend, for example, establishing that it is a ‘genuine gift’ might be challenging, increasing the danger of someone subsequently claiming the property. As a result, lenders are more likely to reject you in this circumstance.
Additionally, the majority of lenders will refuse to accept donated deposits from the individual selling the property. This may be the situation, for example, if you’re purchasing a house from a friend or family member.
Changing regulations and rules
Many lenders tightened their lending conditions at the height of the Covid-19 outbreak. Nationwide, for example, On its 90% mortgages, it authorized up to 25% given deposits, with buyers expected to save the remaining 75%.
These regulations have now been reduced, although restrictions are subject to change on a regular basis. For example, some lenders may ask first-time purchasers to contribute at least 5% of the purchase price in cash, especially if they have bad credit.
Before accepting a given deposit, it is prudent to consult a mortgage expert who is aware of the lending policies of many lenders and can assist you in locating the best mortgage offer.
Demonstrating the receipt of a donated deposit
If you intend to use a given deposit with any lender, you must tell both your lender and your solicitor. Failure to do so may result in delays in the conveyancing procedure.
Generally, the individual who gifts you the money will be asked to sign a ‘given deposit letter’ confirming that the monies are not subject to repayment.
Most mortgage lenders provide a template for a donated deposit letter; however, if not, the letter must include the following information:
- The recipient’s name
- The connection between the giver and the receiver
- The funding source
- The monetary value
- Confirmation that the funds are being given as a gift and do not need to be returned
- Confirmation that the donor will not get a share in the property
- Evidence of the gifter’s financial stability.
The letter should be signed and dated in the presence of a witness by the gifter. Additionally, the gifter must give evidence of identification, such as a passport, and two pieces of proof of residence, such as a utility bill or bank statement.
Additionally, your solicitor will want evidence of finances. This should be simple if the cash originates from a legitimate source, such as the sale of a home. However, if the funds were accumulated over time, the gifter may be required to give a series of bank statements to satisfy your solicitor’s anti-money laundering inspections.
Deposits made on behalf of others and inheritance tax
There are no restrictions on the amount of a donated deposit. However, bigger gifts may be liable to inheritance tax.
Individuals may give away up to £3,000 each year without incurring inheritance tax. Any unused amount may also be carried over to the next year, allowing each parent to contribute £6,000 provided they have not already contributed money to another person.
If the gift exceeds this amount, it may be subject to inheritance tax if the donor dies within seven years after making the contribution. It would be classified as part of the estate in this case. If the entire value of the estate, including the gift, exceeds £325,000, up to 40% in tax may be required.
Protecting a gift of a home deposit
Deposits given as gifts might potentially constitute a danger to the giver. If your kid is purchasing a house with a partner or friend, for example, it is critical to explore what would happen if they subsequently split up.
To assist safeguard your money, it may be prudent to get a declaration of trust or deed of trust from the solicitor working on the property. You may mention here that the funds were provided to your kid and not to their partner or acquaintance. If they divorce, this allows your kid to retain ownership of the donated cash.
A declaration of trust may also be used by those purchasing the property to specify what will happen if they divorce – albeit this may be nullified if your kid subsequently marries the person with whom they purchased the property.
What other options are available?
If a donated deposit is not a possibility for parents, there are alternative ways to assist their children in getting on the housing ladder. These include the following:
Guarantor mortgages: A family member or friend agrees to cover your mortgage payments if you are unable to.
No-down-payment or 100 percent mortgages normally need a guarantee, but the guarantor is accountable for any missed payments if the borrower fails. They also risk losing their house if they used it as a surety for the mortgage.
Springboard mortgages: So-called springboard or family deposit mortgages allow a family member or friend to deposit between 5% and 10% of the purchase price in a lender-managed savings account, with the mortgage being offset against these funds.
To guarantee that the funds are available to cover any deficit in the event the property is sold or repossessed, they must be held in savings account for a certain amount of time. While interest is earned on the money, there is a possibility that your loved one may not get all of the money.
Mortgages in joint names: Another alternative is to file for a mortgage in joint names with your kid. This would render you equally accountable for the loan’s repayment and would jeopardize your future borrowing opportunities. However, because of your combined salary, you may be eligible for a larger mortgage or a lower interest rate.
Bear in mind, however, that if you already own a house, the new one will be treated as a second home, necessitating an extra 3% stamp duty. Capital gains tax may also be due if you sell the property later.
A few lenders enable you to get a second mortgage without being added to the property’s title documents, which may help you save money on taxes. Always seek independent counsel and carefully weigh your alternatives.