Using Equity Release To Gift A Deposit For A Mortgage

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Using Equity Release To Gift A Deposit For A Mortgage, Verve Financial

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Using Equity Release To Gift A Deposit For A Mortgage, Verve Financial

Michelle Boakes

Michelle Boakes explains how you can use 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.

How we can help you
  • We are a fee free mortgage brokerage. We do not charge our customers for any advice – we are purely paid by the lender on completion.
  • We work with dozens of lenders including the high street banks and can compare their deals for you, always with your best interest at heart.
  • We take away the stress and uncertainty of applying directly with a lender who may not have the most suitable deal for you.

Get in touch for a quick informal chat to discuss your options.

What proof is needed when using a gifted deposit? 

Usually, the gifter is required to sign a letter or a form declaring the amount of the gift and that it is unconditional, with no repayment required. It’s also likely that the gifter will have to provide a bank statement to show the funds available.

What are the implications and risks of using equity release to gift a deposit?

It reduces the equity in your own home, which could limit options for you later on in life. If you’re choosing an interest rollup mortgage, the interest is added to the balance and increases over time rather than being paid off monthly. In this case, the amount that you owe to the provider grows and could become a significant amount of debt, especially with the higher interest rates available at the moment [As of January 2024]. 

Equity release could impact your options should you choose to move in the future. The property that you want to move to may not be suitable for an equity release product, in which case you would need to repay the mortgage balance. That then reduces the equity available for your home move.

How common is it for people to use equity release for gifting?

There are definitely some people who are choosing to use equity release for this purpose. In my experience people really want to give children their inheritance early, rather than it being for a specific purpose.

Most of my clients that want to pass on their inheritance early to their family, find the family use it for a mortgage to buy a home, to pay off a mortgage or to move. I would urge people to really consider the advantages and disadvantages of equity release products in relation to their own personal circumstances. 

Whether you are gifting a deposit or giving an inheritance early, it’s really important to consider the pros and cons of doing so before entering into any agreement.

What else do we need to understand about equity release and gifting a deposit?

I think we’ve covered everything. From the giftee’s point of view, do make sure that you inform your mortgage advisor, mortgage provider and solicitor about where the money is coming from. That’s really important. 

If you are the gift donor, or you’re thinking about whether equity release is right for this purpose, it’s important to get some advice. You can go direct to the providers, but they are just there to facilitate your borrowing rather than consider your future circumstances. 

So an advisor is really well placed to consider the potential disadvantages that you may come across in the future. Definitely get some advice before you do it, as there may be more than one way to achieve what you’re looking to do.

Your home may be repossessed, if you do not keep up with your mortgage repayments. 

A lifetime mortgage is not suitable for everyone and may affect your entitlement to means tested benefits, so it is important to seek financial advice before taking any action.  If you are considering releasing equity from your home, you should consider all options available before equity release.  

The interest that may be accrued over the long term with a Lifetime Mortgage, may mean it is not the cheapest solution.  As interest is charged on both the original loan and the interest that has been added, the amount you owe will increase over time, reducing the equity left in your home and the value of any inheritance, potentially to nothing.

Although the final decision is yours, you are encouraged to discuss your plans with your family and beneficiaries, as a Lifetime Mortgage could have an impact on any potential inheritance. We would also encourage you to invite them to join any meetings with your Financial Adviser so they can ask questions and join in the decision, as we believe it is better to discuss your decision with them before you go ahead. This is a referral service.

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