GET IT RIGHT FIRST TIME: Sarah is here to help first time buyers get to grips with the conveyancing process. This month, she discusses the pros and cons of gifted deposits.
According to research by the Council for Mortgage Lenders in 2014, 52% of first time buyers received financial help from a family member or through a government scheme. In the intervening years this number has increased and now, even more of you are relying on a gift of cash to build a deposit and gain access to better mortgage deals.
Parental help can be crucial if you want to climb onto the property ladder, but gifted deposits do come with their own issues, such as who you can lend money from and the proof of funding required by your mortgage lender.
What is a gifted deposit?
The term refers to a sum of money given to you by a family member that forms all or part of the deposit you require to buy a property. A friend can also gift money, but this is looked upon less favourably by mortgage companies.
Anyone giving financial assistance to a first time buyer should seek independent legal advice to clarify their position. Namely, that they will have no interest in the property and no right to their money back.
If an outright gift is not possible, a loan may be provided by a family member that is repaid on the sale, which is called taking a legal charge on the property. Again, professional advice is essential and the arrangement must be agreed by your mortgage lender at an early stage, as it may affect your application.
Will a gifted deposit restrict my choice of mortgage?
Most mortgage products will not change because of a gifted deposit from a family member, however, some will not accept third party gifts. You will need to check this with your lender or financial advisor before making an offer on a property.
The person giving you the money will be asked to complete some form of gifted deposit letter. Most lenders have a standard document, but you will also be asked to provide a letter to your solicitor, confirming the money is an outright gift.
Your lender and/or solicitor will ask to see bank statements or some proof of where the funds are coming from to comply with money laundering regulation. They will also need identification for the person making the gift.
I have some money of my own. Can I combine this with a gifted deposit?
Yes, a gifted deposit can be used in conjunction with your own savings or the Help to Buy ISA scheme.
There are other alternatives to a family member giving you the money outright, such as opening a savings account with the bank or building society with whom you want to take a mortgage. It will then be offered based on the money deposited.
Parents can also act as a guarantor to help you secure a 100% mortgage, which will be offset against their savings. They can even take out a joint mortgage with you to help you onto the property ladder.
If you are planning to use a gifted deposit, it is worth remembering that should the person giving you the money pass away within seven years, inheritance tax may be payable on the funds. This will only apply if their estate, including the gift, is worth more than £325,000.
If you are a first-time buyer with a question about moving home, our residential property expert, Sarah Gaunt, would love to hear from you. Email: email@example.com