House Deposit

Older homeowners have gifted more than £230m to help relatives buy a home in 2020.

A new report by Key Retirement Solutions shows more than £500m has been gifted by over-55s this year, with parents and grandparents increasingly looking to help relatives on to the property ladder.

Here, Which? explains the rules and tax implications of gifting money to boost a family member’s mortgage deposit.

Gifted deposits on the rise due to stamp duty holiday

The ‘Bank of Mum and Dad’ isn’t a new phenomenon, but new research shows gifting has been on the rise in recent months.

Key says older homeowners increasingly looked to help family members with their mortgage deposits during the third quarter of this year.

Of the £230m gifted for house deposits in 2020, £100m came between July and September, with gifts spiking after the government announced a temporary cut to stamp duty until April 2021.

• Help to Buy ISA Savers Blocked From Using Bonus Funds For House Deposit 500,000 potential ISA account holders unaware of small print preventing use of the bonus against the house deposit. Post-Brexit Brings a Minor Rise in House Prices The gloomy forecast of a post-Brexit UK economy has been tempered by a minor rise in.
• House deposit money in premium bonds nightmare. (19 Posts) Add message Report. WTF0ver Wed 18-Nov-20 17:55:09. Invested majority of my deposit from house sale in premium bonds. It was sitting in limbo while I waited to get identity documents back.

Traditionally lenders have required a minimum deposit for a home loan of at least 20% of the house price in order to reduce the risk. So that house worth $600,000 would require a deposit of at least $120,000.

The rise comes during a year when first-time buyers have required increasingly large deposits after nine-in-10 90% and 95% mortgages were withdrawn following the coronavirus outbreak.

• Find out more: latest stamp duty rates and calculator

Do mortgage lenders allow gifted deposits?

Generally speaking, mortgage lenders are happy to accept gifted deposits from family members.

Earlier this year, Nationwide made headlines for only allowing gifts to make up 25% of the applicant’s deposit, but it has now relaxed these rules.

Lenders will usually require you to confirm the following when gifting a deposit:

• The sum gifted;
• The source of the funds (within the UK, within the EU, or outside of the EU);
• Your relationship to the applicant;
• A signed declaration that you won’t have any financial interest in the property;
• A signed declaration that if the money is loaned it will only need to be repaid when the property is sold;
• Photo identification and proof of address.

The biggest banks and building societies have specific forms you’ll need to fill out and sign to make the declaration, but smaller lenders may request a signed and certified letter.

Your child may also need to provide a bank statement proving that the gift came from you as part of the bank’s money laundering checks.

Can the deposit be loaned rather than gifted?

Gifted deposits and loaned deposits are very different things in the eyes of mortgage lenders.

Banks may be happy to accept loaned deposits, subject to a signed declaration that the loan will only need to be repaid when the property is sold.

If this isn’t the case, the lender will consider the loan to be a financial commitment (like a credit card or loan from a bank).

This means it’ll need to factor in the planned repayments when calculating your child’s affordability.

Can anyone gift a deposit?

Lenders sometimes place blocks on who the money can be gifted by.

Parents, grandparents and siblings will usually be permitted, but banks may be reluctant to accept deposits from more distant relatives or friends.

The rules vary from lender to lender, so it’s best to take advice from a mortgage broker if you have a less clear-cut situation.

Tax implications of gifting a deposit

If you die within seven years of gifting cash to a relative, they may need to pay inheritance tax (IHT) on the money.

You can gift up to £3,000 per financial year without qualifying for IHT, and you can carry any unused portion forward by one next financial year.

This means an individual can make gifts totalling £6,000 (or £12,000 for a couple) if they didn’t make any substantial gifts the year before.

IHT rules can be very complicated and any bill will depend on the overall value of the estate upon death.

You can find out more in our guide on inheritance tax on gifts, but it’s worth taking independent advice if you’re unsure about your exposure to IHT.

Is now a good time to gift a house deposit?

It’s a difficult time to buy a home, and for first-time buyers, there are greater barriers than before.

The longstanding issue of saving a big enough deposit has been exacerbated by lenders withdrawing their 90% and 95% mortgages during COVID-19.

This means that borrowers who might have got a mortgage with a 5% deposit a year ago now face needing 10% or even 15% to get on the ladder.

In one sense, this means that it’s a great time to gift a deposit, as first-time buyers are very much in their hour of need.

On the other hand, there might be wisdom in waiting. Current house price increases are being driven by the stamp duty holiday, meaning some people may be overpaying in their rush to buy a home.

And while the tax cut has provoked excitement, it will also only have a negligible impact for most first-time buyers, who were already exempt up to £300,000 in England and Northern Ireland, £180,000 in Wales and £175,000 in Scotland.

With this in mind, it may be better to wait for the market to settle and for more low-deposit mortgages to return before rushing in.

• Find out more: how coronavirus has affected house prices

Ways of gifting a house deposit

There are many ways you can help your child buy their first home, and while gifted deposits are common, it’s important not to stretch your own finances.

Some homeowners use equity release to unlock cash from their home, but this can be an expensive commitment and should only be done after careful consideration and independent financial advice. Similar can be said about accessing money from your pension.

If you don’t have significant savings, there are other ways you can help, including options such as guarantor mortgages (where you use your home or savings as collateral for your child’s mortgage).

• Find out more: how parents can help their child buy a home

Deposit. It strikes fear into home buyers. It’s one of the most talked about parts of buying a house, and the years it takes to save it up are arguably the most difficult part of homebuying. And the biggest deposit question is: how much deposit do I need? Let’s take a look.

0% deposit mortgages

Over a decade ago, you could get a variety of mortgages with absolutely no deposit at all. Right now though, these are few and far between.

The 0% deposit mortgages that do exist are usually guarantor mortgages.

These work by the homebuyer getting someone else – often parents or grandparents – to use their own property or savings as security to cover the deposit percentage.

Lenders have different rules around who can and cannot become a guarantor. Friends and even aunts or uncles for example are often not allowed.

Guarantor mortgages are quite risky, especially for the guarantors themselves. This is because if you can’t pay the mortgage, the guarantors are liable to pay it instead. It could lead to losing the home and the guarantors getting into serious financial problems.

Deposit amount needed for a mortgage

The amount of deposit you need for your mortgage is worked out as a percentage of the value of the house you’re buying. The mortgage is then based off what’s left – the amount you’re borrowing.

So, the largest mortgages you can get are 95% mortgages. This means you would need a deposit of 5% of the cost of the house you’re buying.

You can work this out by grabbing your smartphone and firing up the calculator. Get the house price, and multiply it by 0.05.

The average UK house price in June 2018 was £228,000 according to HM Land Registry.

This would mean the minimum deposit amount you would need for the average house in the UK is £11,400, because £228,000 x 0.05 = £11,400.

Find out more about saving up in our Saving money for a mortgage deposit guide

Recommended deposit for a mortgage

Because your mortgage is a loan, it attracts interest. Less interest means your mortgage is more manageable, keeping repayments under control and meaning you’ll have to spend on buying your house overall.

The mortgages with the best – the lowest – interest rates are only available when you have a large deposit. So, a 20% deposit will normally get you a mortgage with a lower interest than a mortgage that lets you have a 10% deposit.

Also, keep this in mind. A deposit of 15% and a deposit for 17% give you access to the same deals. You only get better deals by going up 5% more to 20%. There are no little steps – you open up better deals every time you hit these milestones, 10%, 15%, 20% and so on.

When you get a mortgage deposit of 20%, you really start to get attractive mortgages.

This means that the recommended minimum deposit size is 20% of the price of your new home. For the average home of £228,000, that’s £45,600. That’s because to work out a 20% deposit on a house, you multiply the price by 0.2.

So, £228,000 x 0.2 = £45,600.

Loan to value (LTV) explained

You’ll see the phrase ‘loan to value’ or the letters ‘LTV’ bandied around a lot in the mortgage world.

It’s a way of working out how much you’re borrowing compared to the total cost of the house. You should be aiming for a low LTV, around 80%

It’s worked out using percentages. It might sound complex, but it’s very similar to working out a deposit.

All you need is your house price, deposit amount, and the amount your mortgage is for. You can work your mortgage out by just subtracting your deposit from the house price. Then, divide your mortgage by your house price, and multiply by 100.

For example, taking our average house price of £228,000 and our recommended deposit for this house price of £45,600, you’ll have:

Mortgage is £228,000 - £45,600 = £182,400
Mortgage divided by house price is £182,400 / £228,000 = 0.8
Then just multiply by 100 to get the final percentage 0.8 x 100 = 80% LTV.

Remember, lower LTVs mean better interest rates, but also higher deposits.

You’ll need to know about LTVs when you remortgage your house as well, so it’s not just something for first-time buyers.

Help to Buy scheme deposits

House Deposit Refund

With the Help to Buy scheme, you need a minimum of a 5% deposit. So, on the average house price of £228,000 that’s £11,400.

Help to Buy works differently to getting a normal mortgage.

House Deposit Loans

Firstly, it’s only available on houses priced below £400,000 in England, below £600,000 in London, below £300,000 in Wales and below £230,000 in Scotland. There’s no scheme in Northern Ireland.

It’s also only available on new build properties.

The mortgage you get is for 75% of the LTV of the house. 20% is taken from an equity loan, with the final 5% taken from your deposit.

In London, the 20% equity loan be as high as 40%, so you’d get a 55% mortgage.

The equity loan is the special part of the Help to Buy scheme.

You don’t pay any interest or fees on it for the first five years. In the sixth year, you’ll be charged 1.75%.

After that, the fee rises by inflation based on the Retail Prices Index (RPI) plus 1% each year.

House Deposit Check

Find out more on our Help to Buy: Everything you need to know page.

Deposit On House Purchase

Share this post on Pinterest: