More and more first-time buyers are relying on the ‘bank of Mum and Dad’ to fund their deposit to enable their first step on to the housing ladder, which is no surprise given that rents are now on average higher than monthly mortgage payments. In fact, it is not just first-time buyers relying on gifted deposits, ‘second-steppers’ are also relying on parents to enable them to buy their dream homes . Gifted deposits also often mean buyers will have lower monthly payments and can open up more favourable mortgage offers.
In 2017 Legal and General estimated that a whopping £6.5 billion would be paid by family and friends towards loved ones’ house purchases, meaning the bank of Mum and Dad are on a par with the top ten mortgage lenders in terms of contributions.
But are there any implications when your deposit is being gifted by a third party? We discuss some important issues to bear in mind below.
WHO CAN THE GIFT BE FROM
It is usual that the gift is being made by a family member, usually a parent but sometimes a grandparent or sibling etc. which is usually acceptable to mortgage lenders. If the deposit is coming from a friend or distant relative, you should ensure you check with your lender at the time you apply for your mortgage that any gift from a third party will be acceptable to them, in order to avoid disappointment and wasted fees.
‘GIFT’ or ‘LOAN’
If the gift is to be repaid at any time this will be a loan and lender’s requirements will be different. For example, this could impact your lender’s decision to offer you a mortgage given that on the purchase of the property you will have another outstanding debt. It could also pose other risks in terms of the third party potentially claiming an interest over the property if the loan was not paid off. You should consult your broker and solicitor and provide full details of your specific situation.
WHAT WILL MY SOLICITOR/LENDER NEED
As mentioned above, you should provide details of the gifted deposit to your broker/lender at application stage. Even if you have mentioned it at this stage, don’t be surprised if you Solicitor advises that they will need to ‘report’ the gifted deposit to your lender once they have received the mortgage offer. Often the mortgage offer will not mention the gifted deposit and your solicitor will need to make sure the bank are fully aware of it and happy to proceed on the basis that some/all of the deposit will be coming from a third party. Bear in mind that your solicitor acts for both you and your mortgage lender so has to ensure that you are both informed of all aspects of your purchase.
Your solicitor will also require the third party to sign a declaration confirming their relationship to you, that the money is an unconditional gift and they will not have any interest in the property being purchased. Some Lenders may even insist that the third party obtains independent legal advice. They will also need to see ID for the third party in the same way they do for a client for anti-money laundering purposes and will ask for further information and evidence as to where the money has come from i.e. savings and investments, inheritance etc.
You should also let your Solicitor know if the third party will be living at the property with you following completion as the bank will need to know about this and will require them to sign a further legal document.
EXTRA COSTS
You should be aware that there may be an extra fee charged by your Solicitor for the extra work involved in dealing with a third party gift, including; reporting the gift to the lender, sending out relevant paperwork to both you and the third party, verifying the third party’s ID and checking that the source of the gift is legitimate and you should check with your solicitor what this fee is likely to be, depending on your individual circumstances.
INHERITANCE TAX
No inheritance tax will be payable on the gift provided the third party survives for at least 7 years after the gift is made.
CONTACT US
Contact our Conveyancing team today to find out how we can help, or to ask us about our conveyancing fees, by calling 0808 1685 643, fill out an online enquiry form, or email getmoving@ramsdens.co.uk and we will be in touch.