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Gifted Deposit Mortgage for First Time Buyers

02/07/2021
(Last Updated: 14/04/2023)
3,696
10 min read
A gifted deposit mortgage for first time buyers is often the only way that they can buy a home of their own, in these times of stratospheric property prices. The main factor is the gift element, which in most cases is a sum of money which a parent gifts to their child or children which is used towards the deposit.

Mortgage lenders have different criteria depending on the different type of mortgage product to use when receiving a gift. There are five types of gifted deposit mortgage for first time buyers, and we explain each in this article:


Did you Know?

45% of first time buyers in 2016-2017 had help in buying either from parents/family/friends (35%) or an inheritance (10%)


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Front-Cover

    1
    Gifted Cash Deposit
This is where you gift either all or part of the deposit to your children to help them buy their first home. Lenders always require you to provide a 'deed of gift' letter (which you can download below), essentially declaring that you are gifting and therefore not requiring the funds to be repaid.

This is what happens most often. One factor to consider is that you no longer control the money given at all and also, should your child be in a relationship with someone, which subsequently breaks down, the gifted deposit funds may be subject to a legal fight between the two partners.

You can draw up a Deed of Trust which plans for this eventuality, which, for example, might stipulate that the gift is to be returned to you in the event of the sale of the house involved, but the lender would have to agree to this because you would, in effect, by attempting to put a charge on the property and this also dilutes the sense in which the funds were a gift.

You may well wish to consult an independent mortgage broker with access to the whole of the market if you wish to do this. They can guide you towards lenders may consider this arrangement.

Do you need a Gift Letter for Mortgage?
Click on either of the following to get your FREE mortgage lender-compliant Gifted Deposit Letter Template

Approved for conveyancing-related gifting purposes by Solicitors

    2
    Genuine Sale Below Open Market Value - Gifted Equity, Landlord to Tenant
This is also known as a Gifted Equity Deposit Mortgage.

An independent mortgage broker can help you find a lender who might grant you a mortgage to buy a property from your landlord at a reduced price. This would depend on how long you have rented your property from your landlord (the longer the better). This is designed to help first time buyers to make the leap from renting to owning their home.

In this scenario, your landlord might, for example, consider selling you a property worth £250,000 for £200,000 and the £50,000 difference would be looked at as the deposit. Your landlord would normally be expected to grant you a minimum discount/'gift' of 10% of the value of the property.

This transaction would involve no physical money being transferred: the deposit is already in the form of gifted equity and you don't have to come up with any funds to put towards the deposit, as explained.

Looking for Independent Legal Advice?

If you are seeking independent legal advice regarding any of these matters to understand fully the legal implications involved, for example for Gifted Deposits and Deeds of Trust, we can help you.

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    3
    Concessionary Purchase - Gifted Equity Deposit
A Concessionary Purchase is sometimes known as an inter-family sale involving a gifted equity deposit.

Typically you offer to sell your home to your child at below current market value and the equity in the property is treated, similarly to section 2 above, as a deposit and your child doesn't have to come up with any further funds towards this deposit for their first home.

An independent mortgage broker may be able to find you a lender who is willing to offer a gifted equity deposit mortgage for a concessionary purchase from a family member who isn't your parent, for example an aunt or uncle.

You should be aware, however, that there are fewer of these lenders not least because of the way the law views the person who is attempting to give the gift. Depending on which family member is involved, there may be a default presumption that the equity that they're attempting to gift is actually a repayable loan.


    4
    Deposit secured as a second charge on parent's property
There are lenders who can advance you up to 100% of the purchase price of your son or daughter’s chosen property; they reduce the risk of this by taking a 25% second charge on your property.

You gain as a parent by not having to fund deposit money from your savings and you don't have to make any of the monthly repayments.

You should be aware, however, that were your child to default on their gifted deposit mortgage repayments, your home is at risk. Once again, an independent mortgage broker can brief you fully about the risks involved.


    5
    Retained Deposit
Some lenders offer retained deposit mortgages otherwise known as no deposit offset mortgages.

Typically the first time buyer puts up a 5% deposit and a helper, be it a parent or parents or grandparents or other benefactor, deposits an additional 10% of the property price into a savings account of the lender. 

The account is interest bearing but the funds can't be accessed for 3 years, after which there is no restriction.

As a benefactor, you only lose access to your savings for the three years after which you might, for example, recycle the funds for another child's use in buying a property in a similar way. 

Once again, an independent mortgage broker can steer you towards lenders offering these kind of gifted deposit mortgages.

Family Members - Gift or Repayable Loan?

As a general rule in law, if someone puts money towards the purchase price of a property and receives no consideration in return then it is presumed that they have intended to retain an equitable interest in the property being purchased (ie they are going to get something back from the sale of the property in the future).

The person buying the property will therefore hold the property on resulting trust for them.

In Dyer v Dyer the judge stated: “the trust of a legal estate...whether taken in the names of the purchasers and others jointly, or in the names of others without that of the purchaser; whether in one name or several; whether jointly or successive, results to the man (person) who advances the purchase money"

There are exclusions (subject to circumstances) to a presumption of resulting trust where it is presumed the money paid is a gift instead which include:
  • Father giving money to their child (not any other relative such as a grandparents, uncle, auntie or siblings)
  • A person acting 'in loco parentis' (from the latin 'in the place of a parent') giving money to a child (this could, for example, be a foster parent or official carer giving money to a child)
  • Husband giving money to his wife
This means that in all of the following cases there is no presumption that the money paid is a gift and that it is presumed the money paid is to be repaid and the property held on Resulting Trust for them:
  • Mother giving money to their child NB although this is normally acceptable to a lender in the case of a mother parent gifting equity in the case of a concessionary purchase
  • Grandparents, uncles, aunties or siblings giving money
  • Wife giving money to her husband
  • Co-habiting couples or mistresses giving money to their partners
  • Friend giving money to their friend
As stated above, some lenders will consider a concessionary purchase to be legitimate when the giver of gifted equity deposit in the property is NOT the mother or father. For example, an aunt or uncle.

But, in all cases your solicitor should confirm with you if any money from a third party being used towards the purchase price is a gift or a loan during the conveyancing ; to satisfy both their obligations towards you and the mortgage lender.


 
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Andrew Boast of Sam Conveyancing
Written by:
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.
Caragh Bailey, Digital Marketing Manager
Reviewed by:

Caragh is an excellent writer in her own right as well as an accomplished copy editor for both fiction and non-fiction books, news articles and editorials. She has written extensively for SAM for a variety of conveyancing, survey and mortgage related articles.

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