Gifted Deposit/First Time Buyers
Buying a property for the first time is a daunting experience at the best of times, however, the post COVID spike has made securing a place on the property ladder especially treacherous.
According to provision statistics from the Registers of Scotland, the average price of a residential property in April 2022 was £187,954. This represents an increase of 16.2% on April 2021. House prices even rose by 3% between March and April 2022. The market has reached pre-2008 levels once more and has created a financial headache for many who need to move home. This, and the well documented cost of living crisis, makes accumulating a sufficient deposit to purchase a suitable property all the more difficult.
In recent years, the Scottish Government have introduced schemes to assist first time buyers with the purchase of their property. For example, the First Home Fund ran from 2019 to 2021 and provided financial assistance to first time buyers, whereby the Scottish Government provided funding towards the deposit which was secured over the property. Many missed out on the First Home Fund due to strong demand. Many first time buyers have had to turn to “bank of mum and dad” to assist with their deposit.
Mortgage lenders require evidence of the deposit source and mainly accept deposit funding from a 3rd party, providing the party providing the funds do not demand repayment and is a close blood relative of the borrower/purchaser. This is known as a gifted deposit. The rules regarding what is acceptable regarding the gifted deposit vary from lender to lender and they must approve the deposit source before proceeding with an application.
There is not usually a ceiling regarding the gifted deposit amount, but, again, this will need to be reported to the lender. There are also potential Inheritance Tax implications to the giftor as, if they pass away within 7 years of gifting the funds, the sum will still be seen as part of their estate for Inheritance Tax purposes. This will need to be considered carefully by both the borrower and giftor before any funds are gifted.
It is imperative to let your solicitor know that part or all of your deposit is a gift. Even though the relevant information may have been provided to your IFA/lender, the solicitor still requires to confirm the source of the deposit for Law Society Anti Money Laundering Regulations and to verify their identification. In the case of a gifted deposit, they will require proof of funding from the giftor. The solicitor will require full evidence of the source of the gift (i.e. the original source and how the funds accumulated) and copy bank statements going back 3 months for the account(s) where the funds are currently held.
A signed letter from the giftor is also required, confirming:
• the relationship between them and the borrower,
• that the deposit funds provided by them are being unconditionally gifted,
• the sum gifted,
• confirmation that they will not occupy or take a security over the property,
• and that no repayments will be made or expected in respect of the gift.
A gifted deposit can make a great difference in the affordability of mortgage repayments and is an option which is useful to explore when buying your first property. If you require any further advice about purchasing your first home, do not hesitate to contact us.
