Can Gifted Deposits Work as a Mortgage?

Can Gifted Deposits Work as a Mortgage?

Parents invest in children’s future and wish for a better one by assisting them at every critical stage of their lives.

Yes, children can use the gifted deposit for buying a house. However, many lenders don’t readily accept the deposit you offer them as a mortgage. The reason is that some home seekers declare a loan as a gifted deposit, which turns out to be a red flag for lenders in the UK.

On average, nearly 64% of the guardians/ parents help their children buy their first house, and the average contribution by the parents towards the gift mortgage turns out to be a whopping £32,440.

What is a Gifted Deposit?

A gifted deposit is an amount given by someone close, like parents to their children, to fund a part or complete sum needed to buy a home. As it is a gift, it does not entail any repayments or the interest rate; it is not a loan. A person provides the sum to others with pure intentions, not to gain equity in the home as an exchange.

According to the UK government reports, “In the UK, only 30% households hold assets that could assist the children in the purchase of a home.”

And the worst part is, if the UK economy weakens further, “the percentage of first-time buyers relying on gifted deposits from their parents for buying a home will increase by 34 in 2025 to 40% in 2029”. Then the rate will gradually decline. The projections are indeed scary and startling.

Who Provide Gifted Deposits?

Someone close or a family member like mother, father, or grandparents as help to buy a home usually provides the money to an individual. Banks or lenders are sceptical about this and thus require clear details of the money the individual receives.

Banks require proof that the money was given to you as a gift by your parents or grandparents. If you receive it as a loan, you will have to repay the amount in repayments.

The deposit will help the children/individuals become eligible for the mortgage. Gauging out the source of the gifted deposit is complicated for lenders, and thus, most of them turn away individuals seeking mortgages through gift deposits.

How does an individual benefit from a gifted deposit as a first-time homebuyer?

If you are a first-time homebuyer in the UK, you can benefit from the gifted deposit. It is because the money given covers the complete or a part that you need to get a mortgage. It is not a loan, and thus you do not require making payment, nor does anyone share the stake in the property.

As a first-time homebuyer, getting a mortgage is difficult, and a gifted deposit from a family member is the only way to expedite the process.

Therefore, planning how much you need for the mortgage and the savings you need to get one will help you secure one easily. Apart from this, securing help from your elders, i.e., guardians, can help you reach the goal quickly and secure a comfortable mortgage.

What Are the Primary Rules for Using the Deposit as First-Time Home Buyer?

As mentioned above, lenders do not readily accept the gift amount as a mode of accepting it as a mortgage. You will first need to prove to the lender that the amount received is a gift and, thus, repayment-free. Instead of taking out loans for bad credit with no guarantor, no fees as an instant decision, if you have been gifted a good sum by someone close, particularly a family member, you can use it for a house purchase. Though, a few requirements you need to fulfil for that:

You will need to send a gift letter to your creditor stating:

  • The name of the person who provided you with the gifted deposit
  • Your name
  • The total amount you received as a gift
  • A statement revealing the same as a proof
  • The relationship between the donor and the one seeking a mortgage
  • The address of the property the individual wishes to purchase
  • Proof that the gift provided has come from a reliable source, i.e., income
  • A statement revealing that the gift has no commercial interest
  • Declaration or confirmation that the gift given has no personal or commercial interest
  • Confirmation that the person providing it is well off and not financially insolvent

Apart from this, you will need to provide:

  • A photo ID, like a driving license or a passport
  • Address proof like–utility bills or a bank statement
  • Bank statements to check the source of the funds received

One needs to provide bank statements to the solicitor as proof of meeting the anti-laundering regulations.

Does one have to pay back the gift deposit?

As the name suggests, “gifted”. A gifted deposit is indeed a gift, and it cannot be a loan. And hence, it should be mentioned in the agreement that the one who receives it is not liable to pay the money back, nor does the giver share any right or stake in the property legally.

Can One Loan the Deposit Instead of Using it as a Gift?

Gifted and loan deposits are entirely different things. And mortgage providers consider both as individual concepts.

A bank may accept a loaned deposit only after the written confirmation that the loan will be paid after the sale of the property. And if you wish to use the gifted deposit as a loan, the lenders will factor in the planned repayments after accessing the buyer’s affordability.

Not all moneylenders convert gifted deposits as a loan or to fund your deposit. The mortgage lender is unsure whether you will manage your loan and mortgage repayments with no hassle.

Do You Need to Pay Taxes on The Gifted Deposit?

No, you do not need to pay tax on the gifted deposit, provided that the person gifting the sum does not die within 7 years of giving the deposit.

Well, the sum offered to an individual as a gift is not immediately liable for tax, but you may have to pay inheritance tax if the giver dies within 7 years of gifting it. However, it only applies if the inherited estate amounts to over £325,000 (including the gifted deposit). Here, one has to pay a 40% inheritance tax that eventually decreases as the 7 years collapse.

While a person who wishes to help someone close with a sum, instead of giving the complete amount, can provide £3000 each year. It will exempt them from taxes. Small contributions may not count as a gifted deposit and, therefore, are exempt from inheritance tax.

What Are Pros and Cons of a Gifted deposit?

However, securing money to buy a house is a wonderful deal. It has its pros and cons.

Pros

  • The quickest way to turn their home buying dream into reality
  • Smaller deposits may help you fetch lower mortgage rates
  • 100% right over the property
  • It is not a loan and thus free from repayments and other obligations

Cons

  • The gift provider needs to provide a guarantee and proof of the deposit
  • Inheritance tax becomes an issue
  • It is risky
  • Turning a deposit into a loan could be an additional trouble for the mortgage borrower
  • Limited lenders accept a gifted deposit as eligibility for providing mortgage

A gifted deposit can be a good way to get quick funds, but it can also have its downsides. Thus, be conscious while using it as a mortgage for your dream home. Analyze the terms and conditions before signing off the mortgage agreement.