Gifted Deposit Mortgage for First Time Buyers

21/03/2018
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.

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5 Types of Gifted Deposit Mortgages

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:
An independent mortgage broker with access to the whole of the market can give you impartial advice on all of the above and choosing to use one is thoroughly recommended.

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    1
    Gifted Cash Deposit

This is where you gift either all or part of the deposit to your children. Lenders always require you to provide a 'deed of gift' letter (which you can download above), essentially declaring that you are gifting and not 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 deposit funds may be subject to a legal fight between the two partners.

You can draw up a Deed of Trust (click to find out more) 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, be 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.

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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%)


    2
    Genuine Sale Below Open Market Value - Landlord to Tenant

An independent mortgage broker can help you find a lender who might grant you a mortgage to buy a property from a landlord at a reduced price. This would depend on how long you have rented your property from your landlord, the longer the better.

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: your gift is already in the form of equity and you don't have to come up with any funds to put towards the deposit, as explained.

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    3
    Concessionary Purchase

A Concessionary Purchase (click to find out more about this subject) is sometimes known as an inter-family sale involving gifted equity.

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.

An independent mortgage broker (click to get a FREE consultation with one) may be able to find you a lender who is willing to accept gifted equity for a concessionary purchase from a family member who isn't a Mum or Dad, 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.

Click on Family Members - Gift or Repayable Loan to find out more about this or see the section below.


    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 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 (click to find out more).

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 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 the equity in the property is NOT the mother or father, say for example it's 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.

Click on Resulting Trust - Beneficial Owners of Property to find out more about this topic.


Related News Articles

 
Concessionary Purchase
28/11/2018
Gifted Deposit Letter
05/12/2017
Gifted Deposit Receiving Money from Overseas
21/11/2017
Gifted Deposit: 3 things you must do when gifting a deposit
19/11/2018
Gifting Property - 4 ways to gift your property
05/12/2018
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