Jane Stewart, Chartered Legal Executive in the Residential Property team at Coodes Solicitors explains what first time buyers need to consider before accepting a gifted deposit.
Rising property prices mean that buying your first home is becoming increasingly difficult. Growing numbers of young people are relying on help from a family member to assist with a deposit on their first home.
The average first time buyer needs a deposit of at least £15,000. Figures from research conducted by Nationwide suggest that it would take most people eight years to save for a deposit. This rises to nine years in the South of England and up to ten years for those buying in London.
It is not surprising then that many young people turn to the ‘bank of mum and dad’ for help. However, the combination of family politics and large sums of money can come with its own set of problems.
A gifted deposit is a sum of money given to someone to form all or part of a deposit on a property. Parental and family help can be crucial to many first time buyers taking that first step onto the property ladder. In most instances it is parents who give their children money for a deposit but sometimes other family members step in to help.
Gifted deposits can be tricky when it comes to areas such as who you are allowed to accept money from and what proof you will need to provide a mortgage lender.
Most mortgage lenders prefer that a gifted deposit is given by a family member and some companies will have very specific criteria when it comes to who can gift the money. For example, some will only allow the money to be gifted by parents and will not allow funds from friends or distant relatives.
Often, mortgage lenders will not accept a gifted deposit if the person giving the money is also the vendor, which could create an issue if you are buying the property from your parents. If this is your situation then there are always alternatives, for example your parents could be named as guarantors on your mortgage application, or they could take out a joint mortgage with you and be named on the title deeds.
It is always important to check who your mortgage lender will accept as a donor and what criteria is involved before you go too far down the mortgage application route.
If you are buying a property with the help of a gifted deposit you will need to inform your solicitor from the outset. They will then go through a series of legal checks to comply with anti-money laundering rules. Providing this information to your solicitor early on in the house buying process can avoid unnecessary, and sometimes costly, delays further down the line.
Once your solicitor has been made aware of the gifted deposit, they will need to ascertain the source of the funds. They will also require copies of bank statements or evidence that the funds were an inheritance for example, as well as obtaining the donor’s ID.
The gift will also need to be reported to the mortgage lender before the transaction can be processed. Each mortgage lender will have their own rules and regulations on gifted deposits but in most cases they will require written proof from the donor that they have no intention of claiming any proprietary or legal interest in the property. The donor will also have to state that it is, indeed, a gift with no requirements to pay back the money.
If the money you are being given is intended to be a loan rather than a gift, then it could impact your mortgage.
Most mortgage lenders will regard a loan in the same way as they would any other outstanding debts you may have. This could then affect the affordability of your mortgage as it introduces an increased element of risk. In addition, a loan agreement will have to be drawn up by an independent firm of solicitors (to avoid any conflict of interest) covering elements such as, how much the loan will be, when it has to be paid back by and how much interest will be included.
At Coodes, our Residential Property team has expertise in supporting first time buyers through the whole property buying process and we are experienced at dealing with gifted deposits. We appreciate that buying your first home can feel overwhelming but with the right information and clear advice we will assist you all the way.