According to a report by the UK Office for National Statistics, house prices have risen by an average of 5-6% per year, while wage growth has been much slower. As a result, the average deposit required to purchase a property has increased which makes getting on the property ladder hard for first-time buyers. Rising living costs, rent, student loans, and general day-to-day expenses make it difficult to save enough for a deposit on a house purchase and many prospective buyers turn to their families for assistance, leaning on what is referred to as “the Bank of Mum and Dad”. One popular way for parents or other family members to help is through a gifted deposit. But what exactly is a gifted deposit, how do lenders view it, and what are the pros and cons of using one?
What is a Gifted Deposit?
A gifted deposit is a sum of money given to a homebuyer by a family member or friend to help them meet the deposit requirements for a mortgage. This money is a gift, not a loan. The individual providing the gift must sign a declaration stating that there is no expectation of property ownership or repayment. This reduces financial strain on the buyer and avoids potential complications or misunderstandings down the line.
How Do Lenders View Gifted Deposits?
Different lenders have different criteria for accepting gifted deposits. Some may have restrictions on who can provide the gift (e.g. limiting it to close family members) or on the amount that can be gifted. Therefore, it’s crucial to check with a mortgage adviser or lender before relying on a gifted deposit.
The key concern for lenders is to verify that the money being gifted does not create any additional financial obligations for the borrower.
Lenders usually ask for proof of where the money has come from to comply with anti-money laundering regulations. This could involve providing bank statements or other financial documentation.
Pros & Cons to Using a Gifted Deposit
One of the most significant advantages of a gifted deposit is that it can help you secure a home sooner than if you were relying solely on your savings. This is especially important in a rising property market, where delaying a purchase could mean paying more for a property in the future. Additionally, a gifted deposit can increase the percentage of the purchase price you are able to cover and this way it can help you access better mortgage rates. Lenders often offer more favourable terms for buyers with larger deposits because it reduces their risk.
On the other hand, while a gifted deposit is a generous gesture, it can sometimes lead to tensions or expectations within families. It’s important to have open and honest discussions about the gift to ensure everyone is on the same page. For parents or relatives providing a gifted deposit, it’s essential to consider the impact on their inheritance planning. Giving away a significant sum of money could affect their financial security in the future or reduce the amount available to other beneficiaries of their estate. To protect all parties, it’s advisable to seek legal advice and ensure everything is documented properly.
Conclusion
A gifted deposit can be a useful tool for many first-time buyers struggling to save enough for a mortgage deposit. It can help secure a home sooner, improve mortgage terms, and reduce financial stress. However, it’s essential to approach the process carefully, considering the potential impact on family relationships, inheritance planning, and legal obligations.
Before accepting or providing a gifted deposit, ensure that all parties understand the implications, and consult with your solicitors and financial advisers to make sure that you have the best advice and guidance when going through the process.
If you would like more information on Gifted Deposits, please contact our property department.
DISCLAIMER
The content of this page is for information only. It is not intended to be construed as legal advice and should not be treated as a substitute for specific advice. Gibson Kerr Ltd accepts no responsibility for the content of any third party website to which this webpage refers. Gibson Kerr Ltd is regulated by the Law Society of Scotland.