House Deposit
Older homeowners have gifted more than £230m to help relatives buy a home in 2020.
You may be able to use a Family Security Guarantee 1 where your parents use available equity (supported by a mortgage over their property, or a term deposit) to assist you with your home purchase. Generally, a big deposit shows the lender what a great saver you are – and this could increase the likelihood of your home loan application being approved. A bigger deposit may mean not having to borrow as much money, which may mean paying less interest over the life of your home loan. It could also mean paying off your loan sooner.
A new report by Key Retirement Solutions shows more than £500m has been gifted by over-55s this year, with parents and grandparents increasingly looking to help relatives on to the property ladder.
Here, Which? explains the rules and tax implications of gifting money to boost a family member’s mortgage deposit.
Gifted deposits on the rise due to stamp duty holiday
The ‘Bank of Mum and Dad’ isn’t a new phenomenon, but new research shows gifting has been on the rise in recent months.
Deposit To Buy House
Key says older homeowners increasingly looked to help family members with their mortgage deposits during the third quarter of this year.
Of the £230m gifted for house deposits in 2020, £100m came between July and September, with gifts spiking after the government announced a temporary cut to stamp duty until April 2021.
The rise comes during a year when first-time buyers have required increasingly large deposits after nine-in-10 90% and 95% mortgages were withdrawn following the coronavirus outbreak.
- Find out more: latest stamp duty rates and calculator
Do mortgage lenders allow gifted deposits?
Generally speaking, mortgage lenders are happy to accept gifted deposits from family members.
Earlier this year, Nationwide made headlines for only allowing gifts to make up 25% of the applicant’s deposit, but it has now relaxed these rules.
Lenders will usually require you to confirm the following when gifting a deposit:
- The sum gifted;
- The source of the funds (within the UK, within the EU, or outside of the EU);
- Your relationship to the applicant;
- A signed declaration that you won’t have any financial interest in the property;
- A signed declaration that if the money is loaned it will only need to be repaid when the property is sold;
- Photo identification and proof of address.
The biggest banks and building societies have specific forms you’ll need to fill out and sign to make the declaration, but smaller lenders may request a signed and certified letter.
Your child may also need to provide a bank statement proving that the gift came from you as part of the bank’s money laundering checks.
Can the deposit be loaned rather than gifted?
Gifted deposits and loaned deposits are very different things in the eyes of mortgage lenders.
Banks may be happy to accept loaned deposits, subject to a signed declaration that the loan will only need to be repaid when the property is sold.
If this isn’t the case, the lender will consider the loan to be a financial commitment (like a credit card or loan from a bank).
This means it’ll need to factor in the planned repayments when calculating your child’s affordability.
Can anyone gift a deposit?
Lenders sometimes place blocks on who the money can be gifted by.
Parents, grandparents and siblings will usually be permitted, but banks may be reluctant to accept deposits from more distant relatives or friends.
The rules vary from lender to lender, so it’s best to take advice from a mortgage broker if you have a less clear-cut situation.
Tax implications of gifting a deposit
If you die within seven years of gifting cash to a relative, they may need to pay inheritance tax (IHT) on the money.
You can gift up to £3,000 per financial year without qualifying for IHT, and you can carry any unused portion forward by one next financial year.
This means an individual can make gifts totalling £6,000 (or £12,000 for a couple) if they didn’t make any substantial gifts the year before.
IHT rules can be very complicated and any bill will depend on the overall value of the estate upon death.
You can find out more in our guide on inheritance tax on gifts, but it’s worth taking independent advice if you’re unsure about your exposure to IHT.
Is now a good time to gift a house deposit?
It’s a difficult time to buy a home, and for first-time buyers, there are greater barriers than before.
The longstanding issue of saving a big enough deposit has been exacerbated by lenders withdrawing their 90% and 95% mortgages during COVID-19.
This means that borrowers who might have got a mortgage with a 5% deposit a year ago now face needing 10% or even 15% to get on the ladder.
In one sense, this means that it’s a great time to gift a deposit, as first-time buyers are very much in their hour of need.
On the other hand, there might be wisdom in waiting. Current house price increases are being driven by the stamp duty holiday, meaning some people may be overpaying in their rush to buy a home.
And while the tax cut has provoked excitement, it will also only have a negligible impact for most first-time buyers, who were already exempt up to £300,000 in England and Northern Ireland, £180,000 in Wales and £175,000 in Scotland.
With this in mind, it may be better to wait for the market to settle and for more low-deposit mortgages to return before rushing in.
- Find out more: how coronavirus has affected house prices
Ways of gifting a house deposit
There are many ways you can help your child buy their first home, and while gifted deposits are common, it’s important not to stretch your own finances.
Some homeowners use equity release to unlock cash from their home, but this can be an expensive commitment and should only be done after careful consideration and independent financial advice. Similar can be said about accessing money from your pension.
If you don’t have significant savings, there are other ways you can help, including options such as guarantor mortgages (where you use your home or savings as collateral for your child’s mortgage).
- Find out more: how parents can help their child buy a home
The term house deposit can be used to describe one of several types of deposits that a buyer or renter makes in order to secure housing for herself. If a person is buying a house, a house deposit usually signifies a down payment or a percentage of the home's price that is paid up front and not included in the mortgage. If someone is renting a house, a house deposit may refer to a security deposit, also known as a damage deposit or rental deposit, that is charged by the landlord before the tenant moves in.
Many mortgage lenders require a house deposit or down payment before issuing a mortgage. Some mortgage programs, however, either do not require a down payment or require a very small down payment. For example, in the United States, the federal housing administration (FHA) routinely guarantees mortgages in which the buyer pays as little as 3.5 percent of the home's sale price as a down payment. In some cases, it is possible for former service members to get a no-down payment Veterans Affairs (VA) mortgage as well. The purpose of a house deposit in these instances is to offer some protection to the mortgage lender so that the house has some equity to compensate the mortgage lender in case of foreclosure.
A house deposit that is paid when renting a house provides the landlord with some financial protection against a tenant skipping out on the rent or damaging the rental unit and not paying for repairs. A rental security deposit is often equal to one month's rent, though some landlords charge more than this. In the United States and many other countries, landlord-tenant law strictly governs the use and management of security deposits. For example, some laws limit the amount a landlord can charge for a security deposit. Laws also may require a landlord to keep a security deposit in a separate account and pay interest on the security deposit to tenants either on an annual basis or when the tenancy is terminated.
House Deposit Scam
Home buyers can sometimes receive grants to assist them in paying a house deposit. The mortgage lender may also have rules that permit the home buyer to borrow the house deposit from another source. Landlords are often hesitant to rent a home to a tenant without some kind of security deposit, particularly in places where tenants have significant protection against eviction. It is, however, illegal in the United States and other countries for a landlord to demand security deposits in a discriminatory manner, such as requiring parents of small children to pay an extra deposit. A landlord may be able to require a larger security deposit from tenants who have bad credit histories or who have pets that may cause damage to the unit above what a normal security deposit could cover.