With the recent, explosive, growth in house prices and wages not growing at the same rate it is very difficult for first time buyers to be able to raise the capital required to purchase their first home. Generally speaking a deposit of 10% is required (although with certain schemes this can be as low as 5%) but if a greater deposit is raised this will lower the monthly mortgage repayments. It is for this reason a gifted deposit is becoming more commonplace for those looking at the first run on the property ladder.
What is a Gifted Deposit?
A gifted deposit is when a third party, usually a parent or family member, gives a prospective buyer a sum of money or equity to be used as the deposit on a property. To qualify as a gifted deposit the amount that is given to the prospective buyer must be done without any expectation by the third party that this will be returned.
By increasing the size of the deposit on a property not only will you be lowering the amount you need to borrow as a mortgage (therefore either lowering your mortgage payments or reducing the length of the mortgage) but you will also be providing yourselves with increasing choice when it comes to lenders and the deals available. Research has shown that over half of deposits are now raised by gifted deposits either through family members of government schemes such as Help to Buy. Whilst a gifted deposit is a great way to raise the capital required for a deposit there are certain areas that should be considered when accepting this money.
Who can Gift a Deposit?
Different lenders have different stipulations regarding who can and can not gift a deposit. The vast majority of the time close family members (such as parents, grandparents and siblings) are permitted to gift the money, however, uncles and aunts and other, more distant, relatives or friends may not be able to do so. It is important that you check this with your lender or mortgage advisor before transferring the money. There are also exceptions on the rare occasions when the property vendor is the one gifting the deposit.
Each lender will also heave their own sets of criteria that are required when buying a house with a gifted deposit. These should be checked with your lender so that you have the appropriate paperwork ready on request. Common requests include:
Confirm the Deposit as a Gift
Quite often, it is required that the person, or persons, who are making the gift of the deposit provides a written declaration that the money is theirs to give and that there are no stipulations attached (i.e. you are under no obligation to return the money). If you are required to pay th money back then this would be considered a loan by many lenders and so the money may be refused as a deposit. The lender may also take into account the cost of your monthly repayments if the deposit is a loan rather than a gift. This could impact on your affordability and may mean that you are not able to borrow as much as you require.
A conveyancing solicitor will also have their own checks on where the gifted deposit has come from as they have a duty to be aware of money laundering. It is likely that your conveyancing solicitor will help you with the letter required for the confirmation of the gift as a deposit. They will also need to carry out their own checks which will include: Checking ID from the gifting party/parties in the form of passport or driving licence. They will also require a minimum of two proof of address documents (utility bill, bank statements etc). This is all part of Anti Money Laundering procedures.
Another part of AML for the solicitor to factor in if gaining proof of funds. The solicitor will require proof of where the money has come from that is being gifted to the buyer. Often this is easy to prove as the money has come from something like a pension drawdown, sale of shares or the sale of an asset. However, it is harder to prove when the money has been accrued naturally through saving of wages or when the money has come from multiple sources. AML procedures are different and vary solicitor by solicitor, however, the appropriate checks will be carried out one way or another.
The Conveyancing Network work with a wide range of experienced solicitors who are used to carrying out the required checks on gifted deposits as well as any other legal matter associated with the purchase of a new property. You can use your tool for conveyancing quotes from a local solicitor near you.