How Does Gifted Mortgage Work?

How Does Gifted Mortgage Work?

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The soaring house prices and the shaken employment sector, have led to many parents, grandparents and siblings pooling in money in order to help their loved ones buy a home. A gifted deposit is a smart way to cut short the journey between your dreams and their fulfilment, is a potentially tax-free method, and helps you access mortgages with lower interest rates.

Read on to learn more about how gifted deposits work and what paperwork do you need to complete before applying for a mortgage.

What is a gifted deposit?

A gifted deposit or gifted mortgage is an amount of money that you can grant to a family member to pay a part of or entirely the deposit that they need to buy a house. What’s noteworthy is that a gifted deposit is a no-strings-attached transaction, meaning that you cannot expect the recipient to repay you.

Since it is more of a grant than a loan, you should think your decision through because you will not be able to demand a stake in the property. The recipient of the gifted deposit will be the sole owner of their property, and will not have any obligation to repay you the money.

Who can give a gifted deposit?

When you get a gifted deposit from a member of your family, the primary concern of a lender is the source where this money comes from. If your gifted deposit is from a friend or family member, it may not pose many problems for you.

However, if it is a courtesy of a distant relative or friend, lenders may not comfortably lend you money – they will either be reluctant or may turn you away altogether. It would be in your best interest to check the regulations around gifted deposits with your mortgage provider.

How can a gifted deposit help me get a mortgage?

Securing a mortgage deal and raising a deposit for your first property is always challenging. A gifted deposit helps a lot of people fulfil their dream of homeownership – for some it’s the only way to expedite the process.

The housing sector saw a rise in prices with the onset of the pandemic. Due to this, there was a decline in the availability of low-deposit mortgages, as lenders restricted their lending criteria. Even now, lenders are circumspect in their criteria – how much to lend and to whom, holding back many from buying the home of their dreams.

Having an idea about how much you might need to set aside to pay the deposit can help you boost your chances of getting a mortgage. It’s always good to start saving early, and if a gifted deposit comes along the way, it’ll further help you access the most suitable mortgage deals available.

While there’s no separate choice of mortgages with a gifted deposit, it would be in your best interest to divulge your intention of using a gifted deposit initially itself. This will be useful during the time when mortgage companies scrutinize your profile – including anti-money laundering checks.

As long as you’re able to back up your gifted deposit with proper documentation, your borrowing journey should be a smooth sail.

How to prove a gifted deposit

Lenders would normally require to present proof or a ‘gifted deposit letter’ written by the person who has gifted you the funds. This letter confirms that the recipient has no obligations to repay these funds to the provider. You could even ask your mortgage provider for a format for the gifted deposit letter.

Ideally, your gifted deposit letter should confirm the following:

  • The name of the recipient of the gifted deposit
  • The relationship between the provider and recipient (parent, grandparent, or sibling, etc.)
  • The amount of the deposit
  • A declaration by the provider that the recipient is not obligated to repay.
  • That the provider will not have any rights on the property.
  • That the provider is themself financially stable.

Most mortgage lenders will usually require the provider of the gifted deposit to show some form of photo identification, address proof and copies of bank statements, to get through the anti-money laundering scrutiny.

Do you get taxed on a gifted deposit?

Are gifted deposits subject to tax?

Let’s say your parent or grandparent grants you a gifted deposit. In such as case, the deposit will be categorized as a Potentially Exempt Transfer, meaning that as long as the provider doesn’t depart their life within the following 7 years, you won’t have to pay an Inheritance Tax (IHT). Although, if the donor passes away within 7 years, the deposit becomes chargeable.

Usually, you are required to pay an inheritance tax at a rate of 40%, on the part of an estate that’s worth more than £325,000. However, the new residence nil rate band (£175,000) on top of the taxable £325,000, introduced for the tax year 2020-21 will allow individuals to leave £500,000 free of IHT.

Alternatively, you could accept a £3,000 tax-free gift allowance annually – the annual exemption. If you save up this annual allowance over time and use it to pay towards your deposit, you wouldn’t have to declare it as a gifted deposit, meaning you’d be exempted from paying the IHT.

The pros and cons of a gifted deposit

Pros:

The biggest upside of a gifted deposit is that it facilitates and expedites the process of home ownership. Even if you have a small deposit set aside for your mortgage, the money from a gifted deposit will help you avail of mortgage deals with lower interest rates, ergo, more affordable monthly instalments.

Cons:

Possibly the only downside of a gifted deposit is the extensive paperwork that goes into your application – gifted deposit letter and other details as required. Also, depending on your situation and the worth of the deposit, you may have to subject your gifted deposit to IHT.

Conclusion

Gifted mortgages are a great way to help your immediate family to make their homeownership aspirations a reality, especially in these trying times. But it is best to look into the intricacies of this arrangement before involving yourself and your family members. It is important to ensure that you will remain financially stable even after donating a gifted deposit to your loved ones.

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