How can friends and family help with gifted deposits

Getting a deposit together when property prices are so high is difficult and the ‘bank of mum and dad’ has never been more important to first-time buyers than it is today.

In this guide, we will look at how family, and sometimes friends, can help with funding the deposit for your first home, what their risks are, and what can be done to protect all parties should the property be sold unexpectedly.

Who can help with a deposit?

Not anyone can be a donor for a deposit. Many lenders will only accept a deposit that comes from an immediate family member – parents, siblings, and grandparents. Some lenders even reject deposits that come from step-parents. If the deposit is coming from a non-family member, you will almost certainly need to talk to a professional mortgage broker to find a lender who will accept the donor. If there is no reasonable link between the donor and yourself as the buyer, then it is unlikely there will be a lender you can use for the main mortgage.

How much deposit is needed?

The minimum size deposit for a mortgage will be 5% of the purchase price. This is because the maximum ‘loan to value’, (LTV) that lenders will go to is 95%. At that loan to value, the interest rates charged by lenders are generally the highest. If the deposit can be 10% or more the rates are reduced due to the lower loan to value, making your mortgage more affordable.

What about inheritance tax?

People gifting money to their children or grandchildren should bear in mind that such gifts may be subject to inheritance tax. As such, they should get professional independent advice surrounding any possible liability before making such a gift.

How can the donor raise the cash?

If the cash is coming from savings, then that is easy – the money just needs to be transferred from the donor to the buyer who can then transfer it to the solicitor acting on the purchase.

Many lenders and solicitors will ask to see evidence of the deposit at the source, so the donor may have to provide at least three months’ bank statements showing the funds in the account.

Some people have the money in investments that need to be withdrawn or cashed in. If this is the case, they should seek advice regarding how best to do that depending on the investments they have. They will also likely have to evidence where the funds are to the lender and solicitor.

Not everyone has the money in a savings account and many family members helping fund deposits need to raise the cash on their own homes. Depending on their ages and incomes, they may be able to do this by a normal mortgage on their own property or a lifetime mortgage/retirement interest-only mortgage.

Should that be the case, they should engage a professional mortgage broker to go through their options. Raising money via a mortgage of any sort to be a gifted deposit is a perfectly acceptable reason to raise funds and becoming more and more common nowadays.

What evidence of deposit will be required?

That will depend on the source of the funds. Often statements going back at least three months showing where the money is will suffice. If that isn’t possible, other evidence of the source of funds will be required.

How can the donors protect their money?

When gifting money for a deposit, more often than not the donor(s) will have to sign a letter or form from the lender to confirm that the money is a gift. That means the money is non-refundable, no interest will be charged on it and the donors will retain no interest in the property that is being purchased. Since the sums of money involved are not inconsiderable, it is understandable that many people would like to retain some control over what happens in the future.

In reality, many people make an unofficial agreement that it is indeed a loan with no interest being charged, but when the property is sold in the future, the money will be returned to the donor. This can go against the letter that was originally signed, therefore we do not recommend anyone deliberately go down such a route.

There are a few forward-thinking lenders who can consider this kind of ‘pay back the money when you sell’ arrangement and we would advise that you get a professional mortgage broker to source such lenders and you should get independent legal advice.

What if the donor does not want to actually gift the money?

Not everyone who wants to help someone buy their home wants to gift the money – they might want it back. Help is at hand from a few lenders.

Some lenders have products called ‘springboard’ or ‘family’ mortgages whereby the donor, (usually a very close family member only) can deposit the funds into a savings account linked to the mortgage. This will often have to total at least 10% of the purchase price.

This can then enable the lender to lend up to 95% or even 100% of the purchase price. When the value of the property has increased so the loan to value is below a certain level, the donors can get their money back – sometimes with interest added.

Products like these can be relatively complex and you should talk to a mortgage broker and a solicitor about the requirements, terms, and conditions.

What alternative schemes are there?

There are other options now that the government Help To Buy Scheme is ending (no further applications can be made from 31^st October 2022). Shared equity and shared ownership schemes allow people to buy certain properties at a discounted price. The standard 5% deposit is only 5% of the discounted price – not the full purchase price, therefore a much smaller amount. This may enable donors to lend if the amount would otherwise be unaffordable.

A couple of lenders also have schemes where the parents can put up their own properties as collateral for the mortgage arrangements.

This works in a similar way to the ‘family’ or ‘springboard’ mortgages in that should the borrower fall into arrears and the property be repossessed, the lender can also repossess the parent’s property to get their money back should the main property sale fail to cover the outstanding monies.

When the main property has increased in value sufficiently, then the charge over the parent’s property can be released. These kinds of ‘cross charging’ mortgage arrangements are quite rare and can be expensive, so we strongly advise talking to a professional mortgage broker and getting good legal advice before entering into such an agreement.

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