How Do Gifted Deposits Work and What Do Lenders Need to See?

For many first-time buyers, getting on the property ladder is only possible with financial help from family. Research published by Nationwide Building Society earlier this month found that more than half of parents charging their adult children rent are putting some or all of that money aside to hand back as a deposit. Gifts from the Bank of Mum and Dad are, for a significant number of buyers, the difference between buying and waiting indefinitely.

If you are receiving a gifted deposit, or giving one, understanding how lenders view it and what documentation they require is important. It is a well-trodden route and there is nothing unusual about it, but there are steps to follow that, if missed, can slow or complicate a mortgage application.

What Is a Gifted Deposit?

A gifted deposit is money given to a buyer to use as all or part of their deposit, where the person giving the money expects nothing in return. The key word is gifted. Lenders need to be satisfied that the money is a genuine gift and not a loan in disguise. If the funds are repayable in any form, including informally, they are treated as a loan rather than a gift, which affects affordability calculations and may require disclosure as an additional liability.

Who Can Gift a Deposit?

Most lenders will accept gifted deposits from immediate family members: parents, grandparents and siblings are generally straightforward. Some lenders will accept gifts from more distant relatives or friends, but the rules vary and some will not accept gifts from non-family members at all. If the gift is coming from someone outside your immediate family, it is worth checking with a broker before making assumptions about which lenders will accept it.

The Gifted Deposit Letter

The standard documentation requirement is a gifted deposit letter, signed by the person giving the money. Lenders have different formats they will accept, but the letter typically needs to confirm the following: the amount being gifted, that it is a gift and not a loan, that the donor has no interest in the property and will not seek repayment, and the relationship between the donor and the buyer. Some lenders also ask for evidence of the donor's source of funds.

Your solicitor and mortgage adviser will guide you on the exact format required by your chosen lender. Getting this right at the outset avoids delays.

Anti-Money Laundering Checks

Solicitors and lenders are required to carry out anti-money laundering checks on all funds used in a property transaction. This applies to gifted deposits. The donor will typically need to provide bank statements showing the origin of the funds and demonstrate that the money has been in their account for a reasonable period. Funds that have recently arrived in an account from an unknown source will raise questions. If the gift is being funded by the sale of another property, savings, pension drawdown or another identifiable source, your solicitor will need to see evidence of this.

Inheritance Tax Considerations

Where a parent or grandparent is gifting a significant sum, it is worth understanding the inheritance tax position. Gifts of money are generally exempt from inheritance tax if the donor survives for seven years after making the gift. Each person also has an annual gift allowance of £3,000 that can be given free of inheritance tax in any tax year. For larger gifts, the seven-year rule applies.

This is a matter for the donor and their own financial or tax adviser rather than something a mortgage broker advises on, but it is worth being aware of if the gift is significant and the donor is older.

Does a Gifted Deposit Affect How Much I Can Borrow?

A gifted deposit does not reduce the amount you can borrow in the same way a loan would. Because it is not repayable, it does not appear as a liability in the affordability assessment. The mortgage is calculated on your income and your own financial commitments, and the gifted deposit simply contributes to the overall equity in the purchase.

Part Gift, Part Savings

Many buyers use a combination of their own savings and a gift from family. This is completely standard and simply requires documentation that makes clear which portion is a gift and which comes from your own funds.

If you are planning to use a gifted deposit and want to understand how it fits into your mortgage application, or which lenders are most straightforward about accepting them, I am happy to go through the options with you. Get in touch and we can discuss the process.

Your home may be repossessed if you do not keep up repayments on your mortgage.

Barry, The Mortgage Network - Helping you make confident decisions and plan a mortgage that works for you.