Buying a house with your parents' money: How gifted deposits work

Buying a house with your parents' money: How gifted deposits work
Saving a deposit for a property has arguably never been harder.

In fact, a report from L & G last year claimed more than a quarter of homebuyers were receiving help towards their deposit.

In 2017, almost 300,000 buyers had help from friends or family to purchase a property, with the average contribution £22,000.

Buying a house with parents' help is on the rise, too, with property prices remaining out of reach for many despite a settling of the market in many locations post EU referendum.

But a house deposit gift from parents isn't simply a case of them handing over a sum of money.

There are things to consider for both the buyer and the family member issuing the gifted deposit...

Bank of mum and dad: How gifted deposits work

The first point to make absolutely clear when it comes to gifted deposits is that they are exactly that: A gift.

They aren't loans as this can affect a buyer's borrowing ability, with even a parental loan classed as a debt.

A gifted deposit is when someone, who is usually a parent, or other family member, gives a buyer a sum of money to be used towards a deposit on a home.

Many buyers use gifted deposits as a way to bring their deposit amount up to obtain better mortgage rates and open up the type of lenders they can approach for a mortgage.

While there are many ways a parent or family member can help a buyer get on the ladder, a gifted deposit is generally considered the simplest way.

Lender rules on gifted deposits

As we said earlier, a gifted deposit isn't simply a case of handing over some money.

Most mortgage lenders have rules around gifted deposits and some stipulate who is permitted to gift.

Family members are usually fine, but distant relatives or friends aren't always allowed to gift in the eyes of the mortgage lender.

Before accepting a gifted deposit, check with mortgage lenders, or your mortgage broker, what rules are in place.

Gifted deposit proof

Many lenders will require 'proof' of the gift, meaning the person handing over the money will need to make a written statement confirming the money is a gift and doesn't need to be paid back.

If you do have to pay back any gift then it's not a gift at all - it's a loan.

And this will be seen as such by the mortgage lender who may not allow it, or may reduce the amount they are willing to lend.

Some lenders choose to add the loaned amount on to the mortgage, increasing monthly repayments and this could also affect your affordability stress test.

Rights to property

The person gifting the deposit may also be asked by the mortgage lender to confirm if they are to own any equity or interest in the property being purchased.

This could mean they have to sign a further declaration stating they relinquish any legal hold on the property.

Gifted deposits and solicitors

Property solicitors and conveyancers are obligated to perform money laundering checks during property purchases.

So, with that in mind they usually require more detail on gifted deposits.

Usually this will include the gifter's full name and identification, as well as bank statements and details about how the money was earned.

Inheritance tax liability

If you receive a gifted deposit and the person paying it dies within seven years, you may be liable for inheritance tax.

This, though, only applies if the gifter's estate, which includes the gift, is worth more than £325,000.

Away from gifted deposits...

There are many other options parents and family members can consider to help a buyer get on the property ladder:

Guarantor Mortgages - Like a rent guarantor, parents can also act as a mortgage guarantor for their children. This sees their income or assets included alongside the buyer's when obtaining a mortgage, but means they are also liable for missed mortgage payments if they occur.

Joint mortgages - A parent's income or assets can be used alongside the buyer's to increase borrowing potential, but unlike a guarantor mortgage the parent would own a stake in the property.

Remortgage - some parents choose to remortgage their own property in order to release equity to gift to their children as a deposit. This is not without its risks, however, and should be discussed with an independent financial advisor.