Gifted Deposits

What is a gifted deposit?

A gifted deposit is a cash gift given with the intention of being used for a mortgage deposit. They are commonly gifted by close relatives, but theoretically they can be given by anyone. This is a great way to increase your borrowing options as your deposit size is increased.

For example, you may have a 5% deposit for a £200,000 property. Not all lenders would offer you a deal with only 5%. Therefore, you are gifted another 5%, so you now have a total of 10%. This would make you more attractive to lenders and potentially increase your chance of a deal.

You must remember this money cannot be paid back, it has to be gifted. Otherwise, lenders may see this as a loan rather than a gift.

How do gifted deposits work?

It’s essential that the money for the deposit is gifted and not given as a loan. This is what classes it as a gifted deposit. Once this is established between you and your donor, you will need to calculate what you can afford with your deposit amount. Do you have additional capital that can be added on top of the donor’s amount? This could open up your borrowing options, as larger deposits are typically more attractive to lenders.

You can then begin to speak to lenders. They’ll require a signed letter for a gifted deposit, or you may need to fill out a gifted deposit form that they will provide. This is to prove that the money is being gifted and not loaned. If the lender believes you meet all requirements, they may offer you a mortgage deal.

Who can give a gifted deposit?

There are no restrictions on who can gift you money for a house deposit. The person that gifts you the money is called a ‘donor’. A lender typically prefers the donor to be a relative – a parent or grandparent, for example.

However, the capital can come from anyone, providing they pass all the lender’s checks. These checks are likely to be more in detail and lengthy for someone who isn’t close family, therefore you could have some difficulties during the application process.

Do you have to declare a gifted deposit?

It is essential that the gifted money for a mortgage deposit is declared. This is because your lender and solicitor will need to know you are not required to pay the money back. Otherwise, it could be seen as a loan, which would make it harder to get approved. Both you and the donor will need to sign a declaration to prove this.

What is a gifted deposit letter?

A gifted deposit letter is what you write to your solicitor and lender to prove that you are not paying back a gifted deposit. Every lender will require slightly different information on the letter, but they usually include:

You can always consult with your conveyancing solicitor to help you put together a letter. They can help you prove all the information you are stating on it. There are also various free gifted deposit letter templates available online, which can make writing it much easier.

Which mortgage lenders accept gifted deposits?

The majority of lenders accept applicants with gifted deposits. When looking to accept individuals, they look closely at the donor’s and applicant’s relationship.

Your options will become limited when the donor is not a close relative. Furthermore, gifts between couples also raise concern, especially when they both live in a property but the term is only under one name.

What type of mortgages can gifted deposit be used on?

Gifted deposits can be used on a range of mortgage types, not just standard residential products. One type that gifted deposits are accepted on is Buy-to-Let mortgages. This can prove very beneficial, as generally Buy-to-Let mortgages require a higher deposit due to the risk that comes with them.

By having a family member or close friend provide you with capital towards your deposit, it can help you obtain a rental property. However, for this type of mortgage we would recommend working with a broker as they are more complex than standard residential mortgages.

Another mortgage type in which gifted deposits can be used are those for the self-employed. In many cases, getting a mortgage as a self-employed individual can be harder than if you were in conventional employment. This is due to the  complex nature of your income.

Finding a lender who’s willing to accept a self-employed applicant with a gifted deposit can be challenging. However, working with a broker can help make the process easier. On top of this, contributing towards the deposit yourself, as well as using the gifted deposit, can help make your application more attractive to lenders.

What alternatives are there to a gifted deposit?

Not everyone is able to be gifted money for a mortgage. However, don’t worry, there are plenty of mortgage schemes designed to help you step onto the property ladder. Some of the most common are:

• Shared Ownership involves you buying a percentage of the property and paying rent on the remaining share. As you are taking a mortgage out on a certain share of the property, your deposit doesn’t need to be as big, making it perfect for individuals with a smaller deposit. Through a process called ‘staircasing’ you can also buy more shares of the property in future.
• Guarantor mortgages require you to have a guarantor that will guarantee mortgage payments will be made. So, the lender has an extra level of security if you are unable to make payments.
• Lifetime ISAs are a government scheme where 25% is added on top of any money invested, up to £1,000 per year. When you are ready to buy a house you can use the capital for a house deposit.

Frequently Asked Questions

Are there problems with gifted deposits?

One downside is you could be subject to inheritance tax if the donor dies within 7 years of gifting you. At the time of writing, December 2024, the standard rate for inheritance tax is 40%.

Another potential downside is that if the donor faces financial difficulty, they could expect you to help them out – essentially returning a favour, which could cause arguments or a falling out. However, if all the correct paperwork is completed, you’re not required to pay anything back.

Is there a limit on what can be gifted?

You’ll be pleased to know that there is no limit imposed by lenders, although it’s always worth checking with your lender and/or solicitor initially to be sure.

What is a ‘declaration of trust’?

Sometimes known as a ‘deed of trust’, a declaration of trust is a legal document outlining that the money that has been gifted will be protected.

It will highlight things like what will happen to the money when the property is sold. This is to protect everyone involved in the property purchase in case of an issue in the relationship later down the line^[1] (for example, if you were to fall out with your parents who had gifted you the deposit).

This document will typically be put together by your conveyancing solicitor during the mortgage process.

What is a vendor discount?

A vendor discount is essentially a type of gifted deposit where the person selling the property reduces the price, usually in order to encourage a quick sale.

However, a lender typically won’t accept the amount that has been taken off the property price as a discount. Instead, it is likely you will also need to put your own additional deposit in order to be accepted.

References

[1] Nelsons Law, How to Protect a Gifted Deposit (11^th March 2023)