According to research by the Council of Mortgage Lenders in 2014, approximately 52% of first time buyers received financial help when buying a home, either from family or through government schemes such as Help to Buy.
With lenders requiring buyers to have quite large deposits it can be hard for first time buyers to raise this without support from parents or other family members. Naturally most parents would want to help their youngsters get a foot on the property ladder and the bank of mum and dad is a popular way to raise the deposit.
But whilst the money is welcome, gifted deposits can bring an extra complication to the buying process as there are several legal issues which arise particularly when the youngster is also having a mortgage.
One of the key provisions of gifted deposit is that the money cannot be a loan it must be a true ‘gift’ and the person providing the money will be asked to sign a legal declaration to confirm this position. This has the effect that the family member providing the money cannot ask for it back, expect repayments nor will they be able to claim any interest in the property later. Any mortgage lender involved with the purchase will usually want to know that the person providing the gift has taken independent legal advice to ensure they understand these points and that they have signed a legal declaration to confirm this position. Any money being ‘loaned’ should be protected by the person providing the money taking a second legal charge on the property which is a different legal process entirely.
A further requirement of a person providing a gifted deposit will often be that they will be required to provide evidence of their ID and a copy of their bank or savings account statement to evidence where the money has come from (this type of gift comes under the standard money laundering rules). Mortgage lenders will have varying rules as to where the money can come from – some will state that whilst mum and dad or immediate family members can provide monies, more distant relatives such as aunts and uncles or people unrelated may not.
Any buyer planning on having a gifted deposit to help with the purchase should discuss the following with their potential lender or mortgage broker at an early point to ensure the requirements of the lender will be met,
- ‘who is providing the deposit money’,
- ‘on what basis the money is being provided’, and
- ‘how this gift might impact on the amount available to borrow’
Whilst it is a great gift for a young buyer to have all or part of their deposit provided they will need to be aware that if the person providing the money dies within 7 years or becomes insolvent within 6 years the details of the gift may come under careful consideration – firstly as to whether inheritance tax is payable on the amount and secondly whether the gift can be clawed back under the insolvency rules. Insurance is available for such occurrences for the buyer and the benefits of this should be discussed with the Conveyancer handling the purchase.