Using Equity Release To Gift A Deposit For A Mortgage

What is a gifted deposit and how does this work? 

A gifted deposit is when you give money to help someone with some or all of the deposit they need to buy a home. It will help them get a mortgage on a house. 

A mortgage lender will require a signed document confirming that the money has been gifted unconditionally, that it does not require repayment and no interest is retained in the property.

Who can give you money for a gifted deposit?

Mortgage lenders will have different rules around who can gift money. Some will allow friends and family and some will only allow gifts from very close relatives.

What are the different scenarios where people might need a gifted deposit?

There are many different reasons that people need a gifted deposit. It might be that the mortgage lender requires a larger deposit than they have in savings – perhaps because of bad credit or low income. 

Some people may not have been able to save for a deposit due to living costs – they have high enough incomes to afford the mortgage but don’t have the savings to back it up. Or, they may be purchasing a property that needs a lot of work, so they need money for both a deposit and home improvements. 

In some cases there’s been a divorce and one party needs to secure new housing as soon as possible. Because we’re in a rising interest rate market, we’re currently seeing clients at the end of their current fixed rate mortgage deal and finding that their new mortgage payments are increasing too much. 

They are reaching a higher level than they feel is comfortable for their own household, just due to interest rate rises. In these situations, we’re seeing a lot of families gifting deposits to reduce their relatives’ outstanding mortgage balance, in turn reducing their payments.

[podcast recorded in November 2023]

If I need a deposit for a mortgage, can I potentially ask my parents or grandparents to help me out?

Yes – mums, dads and grandparents and other close relatives are able to help. On some occasions, friends may be able to too. But there is a really important difference between a gift and a loan. 

If your relative agrees to lend you the money rather than gift it, that will make a difference to your mortgage lender. Some lenders may not accept it altogether, while others will expect you to declare a monthly payment, which will be factored into your affordability.

If I’m taking responsibility for the payments, will the gift affect my mortgage affordability on the property I’m buying?

Yes, if you need to make monthly payments to the deposit loan, you need to declare those to the mortgage lender at the application stage. They will be taken into consideration when determining how much you can borrow. 

If you’re in a situation where you have a high income, that might not be a problem. It’s not to say that it would prevent you from getting a mortgage, but it is something that needs to be factored in.

I haven’t got cash sitting in a savings account to give to a relative – I can use my lifetime mortgage?

Yes, you can take out an equity release product releasing capital from your home to gift to someone and reduce the size of their mortgage.

I would definitely seek advice before you do that. It could be that you’re going to pay a higher rate of interest for that equity release product. Then your relative will be paying for theirs. You want to make sure there’s a fair balance and you’re not going to put yourself in a difficult situation to gift a deposit.

Can you gift a deposit for multiple children? How does this work?

Yes, you can gift as much as you like to whoever you like. There are no limits on the amount that you can gift and there’s no tax liability on it, as long as you gift the funds directly to the recipient. 

If you pass away within seven years of gifting the money, those funds will be added back into your estate when calculating whether any inheritance tax needs to be paid. There will be some relief on gifts that were given within three and seven years of your death as well.

How much can someone gift you for a house? 

You can gift as much as you like. There’s no upper limit. People know that there are certain annual allowances from an inheritance tax point of view, so they tend to think that there are limits. But in fact there are none. 

It’s just that if you passed away within seven years of giving the gift, it will be added back into your estate for inheritance tax purposes. So when your executors are looking at the probate forms and filling in the tax return, they will have to include any gifts given within seven years of your passing.

Do I need to declare a gifted deposit?

Yes, absolutely. It’s really important that you do declare the gifted deposit to the mortgage lender and solicitor. That will make sure the mortgage is processed correctly and properly. Lenders will always request evidence of where the deposit came from, via the solicitors. 

They’re going to want to see how the money arrived in your account or how it was built up. Where there’s a gifted deposit, it just needs to be recorded properly so that the right protections can be put in place for everyone.