Gifting Money for a House Deposit: What You Need to Know
Gifting Money for a House Deposit: What You Need to Know
In today’s challenging housing market, stepping onto the property ladder is increasingly difficult for young people. With the average age of first-time buyers reaching 33 in 2024, many families are turning to gifting money for house deposits to support their children.
With years of experience in the industry, Hansford Bell is here to give insight that cuts through the noise and offers simple solutions to complex situations. This article explores the implications of gifting a house deposit and how to effectively plan for this significant financial decision.
Can You Gift a House Deposit?
Gifting a house deposit is indeed possible and a common practice among families looking to help their loved ones achieve homeownership. However, it’s essential to approach this decision with careful planning and understanding of the various factors involved.
When gifting a deposit, it is crucial to provide a ‘gift letter’ to the mortgage lender. This letter should clearly state that the money is a gift and not a loan, meaning it does not need to be repaid. This distinction is vital as lenders need to ensure that the gifted money does not affect the borrower’s ability to repay the mortgage.
Gift letters generally follow a standard format unless specified by the lenders or other financial institutions that may require you to use a specific template.
A gift letter should contain the following details:
- The exact amount gifted
- The donor’s name, address, and phone number
- The donor’s relationship to the loan applicant
- The date when the funds were or will be transferred
- A statement confirming no repayment is expected
- The address of the property being purchased (if known at the time)
- The signatures of both the recipient and the donor
Keep in mind that your mortgage lender might investigate the circumstances of the gift and request additional information or evidence, such as bank statements, cheque copies, or proof of wire transfer. This is to validate your financial situation, assess risk, and ensure your ability to repay the loan to which the gifted money is being applied.
Donors must also not be perceived as ‘depriving themselves of capital’. For instance, if giving the gift would make them eligible for certain state benefits, it could lead to significant complications.
If you are using multiple gifts for your deposit, you will need a separate gift letter for each one.
What Are the Implications of a Gifted House Deposit on a Mortgage?
Impact on the mortgage application process.
Lenders may scrutinise the recipient’s financial situation more closely to ensure they are not over-leveraging themselves. However, a larger deposit can also positively impact the mortgage by potentially securing better interest rates and terms.
Pro tip: Notify your adviser and lender about the gifted deposit as early as possible. Since different lenders have their own standards and restrictions regarding gifted deposits, transparency is very important. Be ready to provide details about the source of the gift and your relationship with the donor.
Tax Implications of a Gifted Deposit
Gifted deposits are generally tax-free in the UK. However, there are some circumstances in which taxes might apply. For example, gifts can be subject to Inheritance Tax (IHT) if the donor passes away within seven years of making the gift; a tax known as the ‘seven-year rule’. If the donor survives beyond seven years, the gift is exempt from IHT.
Due to the complicated and unexpected tax scenarios that can arise, it’s prudent to consult with a financial adviser to navigate these tax implications effectively and ensure compliance with regulations.
Protecting your Gifted Money
If you’re gifting your child a deposit and they are purchasing a property with their partner or friends, you can safeguard the gifted money in case of a separation with a declaration of trust or deed of trust.
This document will specify the recipient of the gift, ensuring it was given solely to your child and not to their partner or friends. This ensures that if the couple or group splits up, your child retains ownership of the gifted money.
Other Options
If your parents or family want to help you but can’t afford to help you with money, there are still ways they can assist. Options include:
Family Springboard Mortgages: With these mortgages, a family member or friend deposits a sum, typically 10%, into a savings account linked to your mortgage. They must agree to keep the money in the account for a set period, during which they can earn interest. However, if you miss any payments, it might take longer for them to retrieve their money, and they may not get back the full amount with interest.
Guarantor Mortgages: In this arrangement, a family member or friend guarantees to cover your mortgage payments if you fall behind. While this can be helpful, it comes with risks for the guarantor, who may lose their savings or even their home if you default on payments.
Joint Mortgage: You could purchase a home with your child by taking out a joint mortgage, making both parties equally liable for the loan repayment. The combined incomes might allow for a larger loan. However, if you already own a property, the new home would be considered a second home, incurring an additional 3% stamp duty. This can significantly increase the cost. Additionally, if it’s your second home and you remain on the mortgage when the house is sold, you may owe capital gains tax. Some lenders offer joint mortgages without adding your name to the property’s title deeds, which can help avoid these tax issues.
Planning your Mortgage with Hansford Bell
Gifting money for a house deposit can be a generous and impactful way to support loved ones in buying their first house. However, it requires careful planning and understanding of the implications on mortgage applications and potential tax consequences.
By consulting with independent financial advisers like Hansford Bell, families can navigate these complexities and make informed decisions that align with their long-term financial goals. Get in touch today to see how we can support you in taking the first step towards owning your new home.
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Disclaimer: Your home may be repossessed if you do not keep up repayments on your mortgage. This article is for informational purposes only and does not constitute advice.
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