Gifted Deposit Or Loan From Your Parents?
Last Updated: 19/08/2024
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Whilst Borrowing money from family is common when buying property, you may think how the money is given doesn't matter because you are family. However, if you are getting a gifted deposit mortgage, then you'll need to be clear on who owns the money being used to buy the property. Your mortgage lender needs to know if the money is a gift or a loan.
The reason for this is simple, the lender wants to know if anyone else is going to have a claim over the title of the property that could effect them being repaid their mortgage debt.
If you are planning on paying back a gifted deposit then you need a Simple Loan Agreement or else as a parent, you could miss out on being repaid the gifted loan - read on to find out why.
Do mortgage lenders accept gifted deposits?
80% of first time buyers use a mortgage gift from friends or family to fund their home purchase. Mortgage companies have specific processes to follow for applications where there is a gift, however here are some points to consider:
- Is it a mortgage gift or are you going to have to pay it back?
- If it is gifted, what happens if you fall out with the person who gifted the money and wants it back?(read our top rated article - What to do when receiving a gifted deposit
- If it is a loan, is you mortgage lender happy with this? What are the terms of the loan? Is there any interest to pay? When is the debt to be repaid?
Mortgage lenders do not want to have challenges from parents if they have to repossess and sell the property. In the mortgage lender's eye, they'll want to know they can repossess, sell the property and repay their loan without anyone else claiming there is money due to them.
If it is a gift, the mortgage lender will need a letter confirming this. If it is a loan then the mortgage lender needs to confirm they are happy for a 2nd charge to be registered against the property. Often mortgage lenders do not allow this, especially if it is a high loan to value mortgage.
How Do You Write a Gifted Deposit Letter?
Download a gifted deposit letter template, free from hassle.
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- Suitable for mortgage lenders
- Sign, witness and gift the money
The templates will be attached to your confirmation email after payment. Please allow a couple of minutes for the email to arrive.
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Paying back a gifted deposit
Some families give a gift with the understanding it is going to be repaid at some point in time in the future, however a gift is a gift and there is no legal recourse for being paid back a gift.
Issues can also arise where parents give a gift to their child, however the child is buying with their partner. It is advisable in these situations for the parties to get a Deed of Trust drafted to ensure if there is a breakup, the gift goes back to the child instead of being shared with the ex partner.
Is it a gift or a loan?
- 1
Gifted deposit
- Gifted money, with no expectation of it being returned - In English Law, the presumption of advancement states that all money paid by a father to his children is made as a gift, unless otherwise stated. The law only looks at fathers in this way and it is assumed that if a mother pays money to her child, her child will pay it back unless stated otherwise.
- Gifted Deposit Letter required - If the money is a gift then you'll need to provide a letter confirming this to your child's solicitor and mortgage lender. For gifts, you will need a Gifted Deposit Letter.
- 2
Loan deposit
- Gifted money, with the expectation of it being returned - A loan can be provided to fund the deposit in circumstances where your parents want the money to be repaid.
- Loan Agreement required - Because the money isn't a gifted deposit, you'll need to have an agreement clearly stating the terms of the loan. This should include:
- Amount loaned
- Time frame for when the loan is to be repaid
- Amount of interest applied to the loan
- Details of what happens if the loan isn't repaid or the contract is breached
In the event that the loan does have interest to be repaid, then there are additional points to be agreed as set out in the Consumer Credit Act. For most parents, they'll be satisfied for the loan to be repaid and not to benefit from any interest on the loan. We can help draft an agreement to set out the intentions between parents and child.
Is a loan to a child considered a gift?
No and be careful if this is your intention. Declaring to your mortgage lender that you are receiving a gift when it is actually a loan is mortgage fraud. There is however nothing to stop parents gifting money to their children and then for the children to gift the money back at some future date.
Your parents have no legal right to call upon the repayment of their gift and the children could choose not to repay the money because they have either fallen out with their parents, or they simply cannot afford to pay.
These kinds of unwritten agreements can cause arguments in families, especially if their are two children and only one is given the gift.
A gift to their child, not their partner
There can be circumstances when the intentions between parents and children can change, and one of the main contributing factors is marriage. Parents who are unhappy with your choice in life partner may not want to see their gift being shared with your new partner. Often, this can lead to parents seeking repayment of their gifted deposit.
This makes it even more important to have something in writing to state what the intentions were for the deposit when it was given. In circumstances where the money paid was a gift, a parent cannot make claim to it, however they can advise their child to protect their gift from their partner.
One solution is to enter into a Deed of Trust prior to making the purchase, which will clearly state the legal owner of the gift is the child, separate to their partner. Deed of trusts are very common for couples who joint own a property and want to protect the interests separately to each other until they get married.
If the relationship were to break down then on the sale or transfer of the property, the ownership of the gift would be shown as the child's money and as such the partner would not have a claim to it.
Do you need an agreement drafted?
For clients who want to agree terms with their children we provide a detailed shared ownership agreement that is tailored for this relationship. It can be drawn up either for setting terms for the repayment of a loan at set times, or for the protection of the gift given to your children.
We have a wide selection of agreements that can be used to handle this kind of arrangement.
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Written by:
Andrew Boast
Andrew started his career in 2000 working within conveyancing solicitor firms and grew hands-on knowledge of a wide variety of conveyancing challenges and solutions. After helping in excess of 50,000 clients in his career, he uses all this experience within his article writing for SAM, mainstream media and his self published book How to Buy a House Without Killing Anyone.
Reviewed by:
Caragh Bailey
Caragh is an excellent writer and copy editor of books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey, property law and mortgage-related articles.
