Gifted Deposit Buy to Let Mortgage
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Gifted Deposit Buy to Let Mortgage
Scott West explains how using a gifted deposit for a Buy to Let mortgage works.
Can I get a Buy to Let mortgage with a gifted deposit? How does it work?
Yes, you can. Many lenders allow gifted deposits for Buy to Let purchases. It does depend on the lender – some will accept a deposit from any extended family, so that can be grandparents, cousins, brothers, sisters or parents.
Others are a little bit more strict – it might have to be parents, for example, and there needs to be a reason for them offering that deposit. There are quite a few we can go to, it just depends who the gift is coming from.
Can I use a gifted deposit as a Buy to Let first time investor?
Yes, although it does narrow our choices. The criteria for Buy to Let are a bit like the faces on a game of Guess Who. As we get more information from you as the applicant, we start to knock down faces, eliminating lenders we can’t use.
A first time landlord with a gifted deposit does knock down a few lenders, but there are still some left we can use. It narrows your choices, but it can be done.
What are the Buy to Let mortgage eligibility criteria for a gifted deposit? Do all mortgage lenders accept gifted deposits for Buy to Let mortgages?
For most lenders, that gifted deposit has to come from your family. There are some exceptions where lenders may accept a deposit from friends.
In most cases it has to come from the UK – if it comes from a family abroad that creates anti-money laundering problems. It must truly be a gift, with no repayment expected. If repayment was expected, it’s more of a loan.
For example, if your parents are lending you £50K, which you’re going to pay back at some point in the future or monthly, that changes the deposit type. Most lenders won’t accept that because then there is a liability for repayment, which impacts affordability.
Do I need a gifted deposit letter for a Buy to Let mortgage? If so, what will need to be included in it?
There’s no specific format for this. Some lenders want a letter, some want an email, some just want confirmation from the broker.
When it comes to the underwriting process, depending on where the money is we usually only need bank statements. If it’s still in the parent’s bank account, for example, we just need a bank statement showing the balance and the buildup of money in the account.
Perhaps there’s £1,000 a month going into a savings account, it just shows how that wealth has built up and where the money is currently.
If it’s in your account and it’s been transferred recently, we need statements for that and also the bank account it came from, showing the transfer out. That just ticks off anti-money laundering requirements.
Can I only receive gifted deposits from family members for Buy to Let?
It’s primarily immediate family, but there are a few exceptions for extended family like cousins and siblings. Immediate family tends to be your better option.
Is there a limit on how much can be gifted for a Buy to Let deposit?
No. Your benefactor can gift you as much as they like, whether they are parents, grandparents, brothers or sisters. There’s no restrictions on how much they can gift you.
When it comes to the purchase of a Buy to Let, typically you need a 25% deposit. You also need to bear in mind things like valuation costs, legal costs and other professional costs and reports that need to be done.
So you’ll need that 25% plus a few thousand pounds extra to cover the costs. As long as your deposit covers that, whether it’s a mix of your deposit and a gift or it’s entirely gifted, that’s what matters.
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Do you have to pay tax on a gifted deposit when purchasing a Buy to Let?
I’m not an accountant – so please do speak to an accountant about anything tax related. But generally speaking, cash gifts are not taxable.
There are inheritance tax rules that may apply if the giver passes away within seven years, so there’s a bigger question to ask an accountant regarding inheritance tax liability for the gift. But for you, the receiver, there shouldn’t be any tax to pay.
What will happen if a gifted deposit is not declared for a Buy to Let mortgage?
Let’s say your parents gave you some money 12 or 18 months ago and it’s been sitting in your account since. There was a gift, but you didn’t use it immediately. That can change how the lender will view it – some will still view it as a gifted deposit, some won’t.
But in the event there is an immediate gift and you haven’t declared it, the lender may deem that to be mortgage fraud and reject the application. That could seriously hinder your ability to get a mortgage in the future, so transparency is critical.
How do solicitors check the source of funds?
In most instances, the money comes from a relative’s UK bank account into your UK bank account, to buy a UK property. That makes the checks pretty straightforward – as bank statements show the money in the accounts.
UK banks have key requirements and restrictions on how they process money and handle those checks. The money will almost certainly have anti-money laundering checks to some degree.
It’s just about seeing proof of wealth and proof of buildup. In an extreme example, let’s say your parents gifted you £500,000 because you were buying a huge Buy to Let property. But if they are retired and only earn £15,000 a year each, there might be questions about how they could afford that and give it to you.
As long as it’s plausible and you can explain it, there should be no issues getting through that part.
What is the seven year rule for gifted deposits for Buy to Let mortgages?
You will have to speak to an accountant for proper advice on this, but generally speaking, the seven-year rule applies to gifts. If your parents gift you £100,000 and they die within seven years of that, the government considers the money to be within their estate. That means they are taxed on it twice.
If a parent gave you £100,000, then passed away the next year, that £100K would be deemed to be in their estate when calculating the inheritance tax liability. There are some ways around that, potentially, but your accountant can give you better advice.
What is the alternative to gifted deposits for Buy to Let mortgages?
There are a few different options. The obvious one is to have your own deposit in the first place – your own savings.
There used to be a few lenders that would accept personal loans as a deposit, which was interesting. You could go and get a £30,000 loan from your bank and then immediately put that in as a deposit. I don’t think many do that now.
Equity release from another property is another solution. If you already have your own home with equity in it, or you’ve got parents with equity in their home, you could look to release capital from that property. But if it comes from a parent, that becomes a gifted deposit anyway.
You might look at a bridging loan – maybe you want to buy a property without your own deposit. You can purchase with a bridging loan secured against both properties. That’s an equity grab versus a gifted deposit, and can simplify things for the purchase. It’s all about how you look at the problem.
What are the pros and cons of a gifted deposit for a Buy to Let mortgage?
Well, anyone giving you money is a good thing, right? Obviously, the pros are that it allows you to get into the property market quicker than you could by yourself.
Ultimately, for you as the recipient, your Buy to let acquisition gives you a much better return on your own investment – in terms of what you’ve physically put into it yourself.
Also, as the deposit becomes larger and perhaps becomes more than 25%, you could benefit from a lower rate, potentially, or different lender choices.
In terms of the cons, obviously, a gifted deposit can restrict some lender choices. We might lose lenders from our options if we’re using gifted deposits from different people.
How can a mortgage broker help here? Have you got anything else to add or do you think we’ve covered all that we can here?
We’ve covered most of it. The key takeaway is that a mortgage broker can connect you with the right lenders to accept gifted deposits from parents or siblings, aunts, uncles, grandparents, whatever it might be.
We approach the right lender to begin with and then streamline the underwriting process, so that there’s no issues when it comes to proving the source of wealth.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE MOST Buy to Let MORTGAGES.
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