Guide To Gifted Deposits: What Are They And The Pros And Cons

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A gifted deposit is a sum of money that is typically given by close family members. This is not a loan, meaning no money has to be repaid, but rather an accepted and highly beneficial way to get on the property ladder for those who see a mortgage deposit as insurmountable.

This guide will go over how gifted deposits work, their pros and cons, and how lenders view them.

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How Does A Gifted Deposit Work?

A gifted deposit is one of the most popular ways that first-time buyers pay their mortgage deposit. Mortgage lenders offer better mortgage deals and lower mortgage repayments to buyers who pay a higher percent on a property.

That being said, we need to highlight that the main characteristic of a gifted deposit is that the money is a gift. This is crucial, as it establishes an understanding that no repayment is necessary. A mortgage lender will want this exact detail highlighted in the gifted deposit letter, thereby ensuring this money is not a loan and comes without a repayment obligation or stake in the property.

Despite this, some tax implications come with gifted deposits. For example, if the person gifting dies within seven years of issuing the gifted deposit, you could pay inheritance tax. If this is a concern, we advise you to receive independent financial advice to navigate this area.

What Is A Gifted Deposit Letter?

Mortgage lenders want explanations for where money is coming from, especially in the case of a gifted deposit. A gifted deposit letter is a short letter full of key details and declarations that prove the overall intention and source of the funds. The letter will include the following:

  • Donor’s Details – The letter should include the full name and contact details of the gift giver.
  • Recipient’s Details – The letter should outright state the name of the recipient.
  • Relationship – The nature of the relationship between the giver and the gifted should be specified for the context behind the gifted deposit.
  • Amount – Outline the lump sum of the gifted deposit.
  • Purpose – Explicitly state what you’re giving the money for.
  • Declaration of Gift – This is the most critical part of the letter. This is where you declare that the money is a gift and that there is no expectation of repayment on the gift giver’s mind.
  • Property Disinterest – The gift giver must outright state that they have no interest in having ownership or a stake in the property.
  • Date and Signature – The signed letter must be dated, with clear signatures. Sometimes a witness signature is required.

Furthermore, they may require the following from the gift giver:

  • Bank Statements – Bank statements belonging to the sender, showing the origin of the funds are vital to comply with anti-money laundering compliance.

What Are The Pros Of A Gifted Deposit?

Whilst money coming to you is a great benefit in and of itself, in the context of a mortgage, how much money you can bring to a deal at the start changes the landscape of the contract.

Better Terms

  • Lower Interest Rates – Loan-to-value (LTV) ratios are a large part of what determines how much interest rate you pay. When you pay off a large amount of your property cost via a deposit, the LTV drops, and so do your interest rates. Having low-interest rates means lower monthly payments.
  • Loan Amount – Your overall loan will lower with the more deposit you have because less money is required to borrow.
  • Mortgage Tiers – Mortgage lenders have tiers of product packages they offer to borrowers. Down payments give access to these tiers.

Increase Eligibility

  • Faster Agreement – Mortgage lenders look favourably on gifted deposits, and will consider their applications higher priority than others.
  • Massive Affordability – Most mortgage lenders use affordability calculations to determine if a borrower can consistently make mortgage payments.
  • Lower Risk – The ability to make large initial investments on a property is a huge plus in the eyes of a mortgage lender, as a large part of their job entails managing the risk of repayment failure. However, that plus is only emphasised if the deposit is a gift. This is because gifted deposits don’t take away from the borrower’s ability to make repayments, lowering the risk that they will run into issues.

Improved Experience

  • Immediate Access – A gifted deposit dramatically reduces or outright eliminates waiting periods commonly reserved for raising funds. This allows people to get on the property ladder immediately.
  • Increased Stability – A gifted deposit leaves your bank account free, allowing you to focus your money on enhancing your stability and security.
  • Boosted Equity – Starting with a higher equity stake in a property through a gifted deposit puts you on an upward financial trajectory.

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What Are The Cons Of A Gifted Deposit?

For all the good a gifted deposit does, some issues may arise.

Tax Implications

  • Inheritance Tax – Accepting gifted deposits subject the receiver to the possibility of paying inheritance tax. If the person gifting the deposit dies within seven years, the total sum of the gifted deposit could be taxed.
  • Legal Implications – Gifted deposits need to come with the proper documentation precisely to avoid situations like inheritance tax. The gifted deposit letter, for example, must be explicit in the intention of avoiding any legal interest in the ownership of the property.

Lending Restrictions

  • Lender Acceptance – Mortgage lenders tend to accept gifted deposits, but some come with conditions. For example, some will only accept using a gifted deposit given by a family member, rather than a close friend.
  • Additional Assurance – Some mortgage lenders will require more paperwork, such as a commercial interest confirmation, to ensure the gift giver does not press a claim on the property.

Final Considerations

The concept of gifted deposits is fairly straightforward, but these next tips should allow you to sidestep any possible complications.

Inheritance Tax Mitigations

To mitigate potential inheritance tax liabilities, it’s crucial to establish early financial safeguards.

  1. Set Up Contingency – Setting up a specific savings account to cover any future IHT liabilities. Otherwise, consider obtaining life insurance for the gift giver. They can be designed to cover any possible IHT claim in the future.
  2. Connect With A Mortgage Broker – Specialist mortgage brokers can help their clients attain niche deals. You may think that a mortgage broker may be a place only for people with a lower credit history, but in fact, mortgage brokers are experts who know the ins and outs of the market. They can pinpoint the perfect deal for you, including how to avoid negative tax implications.

Conclusion

Overall, a gifted deposit can put you on an upward trajectory early on into what could be the biggest investment of your life. At When The Bank Says No we offer mortgage broker services to mortgage seekers who are looking to lend, but who may have a history of bad credit or who may have employment circumstances that traditional mortgage lenders are more cautious of, such as being self employed. 

Whilst a gifted deposit is a huge step forward for individuals in the above situations, the best thing you can do is work with a mortgage broker who can highlight your low risk borrowing nature thanks to your gifted deposit and the changes you’ve made in your life to improve your credit. 

It’s our job to find you the best mortgage deal, no matter your personal circumstances – so why not let us help you today?

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FAQ: Can a gifted deposit be used for an investment property?

Yes, but typically, most lenders have stricter criteria for investment properties due to them being a higher risk. As a result, there is often a requirement to pay a higher percentage of the property via a deposit outright, or provide proof that the buyer is financially solvent beyond what’s typically asked.

FAQ: Are there limits on how much a gifted deposit can amount?

There is no limit to the overall lump sum you can give as gifted deposits. That being said, the closer gifted deposits come to affecting the donor’s own financial situation, the less a lender may come to look at it as a gift. Even with clear outlining, gifted deposits are sometimes subject to inheritance tax in the event of a donor’s death.

Each lender is fully within their rights to consider the many risks posed both by the gifted and the person gifting.

FAQ: Can multiple people give gifted deposits?

Yes, multiple people can gift deposits. In fact, it’s not uncommon at all for friends and family to get together and pool their money towards funding a property for someone they have in common. Each donor requires a deposit letter as outlined above, as well as their bank statements in many cases. There may also be required documentation from the gift receiver to show the overall flow of gifts into the receiver’s account.

There are not many drawbacks to this method of raising capital for a deposit. It allows the potential greater clearing of funds, and also potentially less drawback on each individual donor. The only real issue that comes about as a result of this is coordination. There is a lot of documentation to go through and a higher level of scrutiny, which could lead to mistakes and delays.

FAQ: How can Mortgage Calculators help when planning to use a gifted deposit?

Mortgage calculators are the ultimate planning tool for both prospective and veteran homeowners. The following are what you can expect:

  • Calculating Borrowing Limits – Input the total deposit you’re able to front as a result of the gifted deposit and other funds. This should outline the maximum loan you’re entitled to. This typically reduces the loan amount needed. This could mean you could get it for cheaper, or perhaps open up avenues for more appropriate/desired properties.
  • Monthly Payment Reduction – Using a gifted deposit in a property purchase means the loan amount is smaller, requiring lower repayments. The calculator allows you to figure out these exact payments.
  • Comparing Mortgage Options – By altering the deposit in the calculator, you can simulate the affects the amount has with terms and interest rates of different lenders. This shifts the balance of power in your favour, as instead of them choosing you, now you can choose which option aligns with your future financial goals the best.
  • Calculating Loan-To-Value (LTV) Ratios – Inputting the gifted deposit amount allows you to see your LTV ratio. This figure is a determinant of the interest rates and your loan eligibility.
  • Total Interest Cost – A mortgage calculator can break down how much interest you’ll pay over the course of the loan’s life. Interest is ultimately a fee that you pay to the lender for using their money. In that case, the lower the overall loan is, the lower the interest is.
  • Visual Amortisation Breakdown – The total deposit, including the gifted amount, can provide an amortisation schedule. This illustrates how repayments are divided over time, and how large your equity will be as a result of the high downpayment.
  • Financial Resilience Testing – Adjusting deposit and income variables will help you assess how well you could handle financial disruptions, like job loss or unexpected expenses. It’s important to test this, and keep in mind that many a mortgage advisor will advise you never spend more than 25 – 30% of your monthly take-home pay. 

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Emma Jones
Emma Jones
Emma began her career in Lloyds Banking Group, first in the unsecured & secured loans department at Halifax and later as a mortgage advisor at Lloyds. During 9 years in these roles and a further 2 years at Yorkshire Building Society, Emma was able to observe the impact of the recession, and how the banks let their customers down by denying loans and mortgages. Wanting to be a driving force for change, she stepped into a market advice role where she has been able to help clients when others couldn’t. Identifying a gap in the mortgage space, Emma went on to establish When the Bank Says No. As a keen property investor, she has been the focus of features in publications including The Sunday Times and This is Money. Emma’s greatest joy is overcoming the low expectations of their customers, many of whom have all but given up on getting a mortgage due. One thing Emma has learned through her own personal struggles is every client must be treated like a human and understood better by advisors and lenders in the industry. “We all have to navigate life events which can ultimately impact your financial status. It shouldn’t mean dreams of homeownership or business growth should have the breaks applied”. Emma and her team’s passion for helping people overcome the challenges they may face when applying for a mortgage have fuelled the success of When the Bank Says No.