When purchasing a property, securing a sufficient deposit is one of the most significant financial hurdles you’ll encounter. Saving a large enough deposit, especially when you are having to pay rent and bills at the same time. Can be very difficult. For many, this process becomes more manageable through the help of a “gifted deposit.” However, understanding the ins and outs of gifted deposits, including the legal obligations and potential repercussions of not declaring them, is crucial. In this comprehensive guide, I’ll explore what a gifted deposit is, its sources, the need for transparency with mortgage lenders, advisors, and solicitors, and the potential legal implications of not declaring a gifted deposit.
What Is A Gifted Deposit?
A gifted deposit is a sum of money given to a homebuyer by a family member, to help them purchase a property. The key characteristic of a gifted deposit is that it does not need to be repaid and is simply a gift. If the money has a caveat that it needs to be paid back, then this means that it is a loan rather than a gift. This financial assistance can make a significant difference in the buyer’s ability to secure a mortgage and purchase a home, particularly in a competitive market where a larger deposit can lead to better mortgage terms.
For instance, if you’re purchasing a property for £300,000 and you have £20,000 saved, a family member might offer you an additional £30,000 as a gift. This gifted deposit boosts your total deposit to £50,000, potentially qualifying you for better mortgage rates and terms.
Sources Of A Gifted Deposit
Generally a deposit must be gifted from a close family member. It is normally not acceptable for a friend to gift you a deposit to buy a property. Gifted deposits typically come from:
- Parents: Commonly known as the “Bank of Mum and Dad,” parents are the most frequent source of gifted deposits. There normally isn’t a maximum amount that a parent can gift. However they need to gift a minimum amount, and this depends on the specific lender’s criteria.
- Grandparents: Like parents, grandparents often contribute to help younger generations get on the property ladder. The only real criteria that lenders have for this is that it must be a non-refundable gift.
- Other Relatives: Siblings, aunts, uncles, and even cousins might provide financial assistance. Less common than parents or grandparents, but aunts, uncles, cousins, and siblings can all potentially gift a deposit. But they may be under more scrutiny as they may not be perceived as close a relative as parents or grandparents.
- Vendors: Sometimes, the seller of a property may offer a vendor gifted deposit as an incentive to close the sale. For example, many new build developers with offer a 5% deposit contribution as an incentive to buy the property. So say you are buying a home for £200,000 and you have 10% deposit (90% mortgage). A builder could offer you an extra 5% bringing your total deposit to 15% (85% mortgage).
Do You Need To Declare A Gifted Deposit?
Yes, it is crucial to declare a gifted deposit. Transparency is key in the mortgage process, in every single step. Failing to declare a gifted deposit can have serious consequences.
Declaring To Your Mortgage Lender
Your mortgage lender must be made aware of any gifted deposit. Lenders need to know the source of all funds used for the deposit to ensure that you are not taking on additional debt that could compromise your ability to repay the mortgage. Not declaring a gifted deposit could be considered mortgage fraud, a serious offence with legal consequences.
My managing director here at Oportfolio Mortgages Oliver Whitehead, emphasises, “Mortgage lenders are increasingly vigilant about the sources of deposits. Failing to declare a gifted deposit can lead to significant legal and financial repercussions, including the rejection of your mortgage application or, worse, prosecution for mortgage fraud. At Oportfolio we are extremely diligent when we package our mortgage applications and being as truthful and transparent as possible is essential for a successful mortgage application.”
Declaring To Your Mortgage Advisor
Your mortgage advisor plays a crucial role in securing your mortgage and ensuring that everything is above board. It’s essential to inform them about any gifted deposit so they can provide accurate advice and guide you through the process. Advisors can also help you navigate the specific requirements of different lenders and ensure that all necessary documentation, such as a gifted deposit letter, is in place.
Declaring To Your Solicitor
Your solicitor will also need to be informed about any gifted deposit. They are responsible for conducting various legal checks, including gifted deposit solicitor checks, to ensure that the funds are legitimate and that there are no potential legal issues. Solicitors are required to report any suspicious activity, including undeclared gifted deposits, to prevent money laundering and other illegal activities.
Who Else Needs To Know?
In addition to your lender, advisor, and solicitor, other parties who may need to be informed about a gifted deposit include:
- The Land Registry: In some cases, details of a gifted deposit may need to be included in the paperwork submitted to the Land Registry.
- HM Revenue & Customs (HMRC): If there are potential gifted deposit tax implications, HMRC may need to be informed, particularly if the gift exceeds certain thresholds. Your solicitor will make you aware of this if it is required.
Legal Repercussions Of Not Declaring A Gifted Deposit
Failing to declare a gifted deposit can have serious legal consequences. The most significant risks include:
- Mortgage Fraud: If you do not disclose a gifted deposit to your lender, you could be committing mortgage fraud. Mortgage fraud is a criminal offense, and the penalties can include fines, imprisonment, and a criminal record. In some cases, the lender may demand immediate repayment of the mortgage or even repossess the property.
- Application Rejection: Lenders have stringent checks in place, and undisclosed gifted deposits can lead to the rejection of your mortgage application. This can delay your property purchase or prevent it from going through entirely.
- Legal Action: Your solicitor is obligated to report any suspicious activity, including undeclared funds. If they discover an undeclared gifted deposit, they may refuse to act on your behalf, report the issue to the authorities, or take legal action.
- Loss of Trust: Not declaring a gifted deposit can lead to a loss of trust between you and your lender, advisor, and solicitor. This can make it more challenging to secure a mortgage in the future or receive favourable terms.
Documenting A Gifted Deposit: The Gifted Deposit Letter
When receiving a gifted deposit, it is essential to document it properly. This is typically done with a gifted deposit letter, which serves as a formal declaration that the money provided is a gift and does not need to be repaid. A gifted deposit letter template usually includes the following details:
- The names and addresses of both the giver and the recipient
- The relationship between the giver and recipient
- The amount of money being gifted
- A statement that the money is a gift and does not need to be repaid
- Confirmation that the giver will have no financial interest in the property
- The giver’s signature and the date
Using a gifted deposit letter template can help ensure that all the necessary information is included. This letter must be provided to your lender and solicitor as part of the mortgage application process.
Gifted Deposits And Proof Of Funds
Lenders require proof of funds for all deposits, including gifted ones. This means that the person giving the gift must provide evidence of where the money came from, such as bank statements or other financial documents. This requirement helps lenders ensure that the money is not being borrowed from another source, which could affect the borrower’s ability to repay the mortgage.
Failure to provide adequate gifted deposit proof of funds can lead to delays or the rejection of your mortgage application. It’s essential to gather all necessary documentation and work closely with your lender and solicitor to ensure everything is in order.
Potential Problems With Gifted Deposits
While a gifted deposit can be incredibly helpful, it’s not without its potential issues. Some common problems with gifted deposits include:
Family Disputes: If the gift is not clearly documented or if there are misunderstandings about the nature of the gift, it can lead to family disputes.
Tax Implications: Depending on the amount of the gift, there may be gifted deposit tax implications. If the person giving the gift passes away within seven years of the gift, it may be subject to inheritance tax.
Lender Restrictions: Not all lenders accept gifted deposits from all sources. It’s essential to check which mortgage lenders accept gifted deposits and ensure that your lender is one of them.
Residency Issues: If the gift is coming from abroad, there may be additional checks and complications. Gifted money from abroad can raise concerns about money laundering, requiring extra scrutiny and documentation.
When Does A Gifted Deposit Become Savings?
One question that sometimes arises is “When does a gifted deposit become savings?” Generally, a deposit gift is considered part of your savings as soon as it is transferred into your account. However, it’s still important to declare it as a gift to your lender, even if it has been sitting in your account for some time. Transparency is essential to avoid any potential legal issues or complications with your mortgage application.
Paying Back A Gifted Deposit
While a gifted deposit is typically not meant to be repaid, situations can arise where the giver may request repayment, especially if circumstances change. Paying back a gifted deposit can complicate your mortgage agreement, as the lender might view this as a loan rather than a gift. If repayment is a possibility, it should be clearly outlined in the deposit letter and discussed with your lender to avoid any misunderstandings.
Gifted Deposit Rules And Best Practices
Understanding the rules requires careful consideration and adherence to legal and financial guidelines. Here are some best practices to keep in mind:
Be Transparent: Always declare a deposit gift to your lender, solicitor, and advisor.
Document the Gift: Use a deposit gift letter to formally document the gift.
Provide Proof of Funds: Ensure that the giver can provide evidence of where the money came from.
Understand Tax Implications: Be aware of any potential tax implications, particularly if the gift is large or the giver is elderly.
Consider Legal Advice: If there are any complexities, such as a vendor deposit or a gift from abroad, seek legal advice to ensure everything is handled correctly.
Speak To A Mortgage Advisor
A deposit as a gift can be an invaluable resource when purchasing a property, helping you secure a mortgage and potentially better terms. However, it’s crucial to handle gifted deposits with transparency and diligence. Declaring the gift to your mortgage lender, advisor, and solicitor, properly documenting it with a deposit gift letter, and understanding the potential legal implications are essential steps in the process.
Failing to declare a gift can lead to severe consequences, including accusations of mortgage fraud, legal action, and the rejection of your mortgage application. By following best practices and ensuring that all parties involved are informed and compliant with legal requirements, you can successfully navigate the complexities of gifted deposits and move forward with your property purchase with confidence.
I always say that when it comes to buying property, transparency is not just a legal requirement but a critical aspect of a smooth and successful mortgage process. Always declare your gifted deposits and work with your advisors to ensure everything is in order. If you or anyone you know is looking to purchase a property, please contact our team today for a fee free initial mortgage consultation.
