10 ways to maximise your mortgage chances
Here are 10 top tips to help improve your likelihood of being accepted for a competitive mortgage deal
First-time buyers are increasingly relying on gifted deposits to get a mortgage. Find out what a gifted deposit is, how they work and any legal and tax implications
With property prices stubbornly high and some lenders now demanding larger deposits, many parents are jumping to their children’s rescue to help them purchase their first home by giving – or ‘gifting’ – them a deposit.
A gifted deposit is when a homebuyer receives money – usually from a family member – to use as a down payment on a property. It could be used for the whole deposit, or just a part of it.
The key word here is ‘gifted’; this money isn’t a loan and gifted deposits are given with the understanding that the money doesn’t need to be repaid. The person who is gifting the deposit will not be given any stake in the property in return either.
The bigger the deposit you can put down, the greater access you’ll have to the lowest interest rate. And a lower interest rate means a lower monthly mortgage payment.
Immediate family members (like parents and grandparents) are preferred by mortgage lenders when it comes to gifted deposits. They might be more wary when it comes to friends or distant family which could slow down the process.
You will need to make both your solicitor and mortgage lender aware that your deposit has been gifted as part of its anti-money-laundering checks.
If you are using a gifted deposit to buy your house, there are a few things you will need to provide your mortgage lender with first.
Providing proof that your deposit is a gift and not a loan with a signed ‘gifted deposit letter’ from the person giving you the money, is the first step to getting a mortgage with a gifted deposit. The lender is likely to provide its own template but, if not, the document should include the following information:
The letter will need to be signed and dated by the gift giver and signed by a witness. If you’re unsure about your gifted deposit letter, your mortgage advisor or lender should be able to provide you with a document template.
Whoever is gifting you the mortgage deposit will need to provide the lender with some personal documents, such as:
Supplying these documents is necessary to comply with anti-money laundering regulations. Your solicitor will also request such documents.
Instead of a family member gifting you a deposit for a mortgage, you could nominate a parent (or grandparent) as your mortgage guarantor who can ‘guarantee’ your mortgage should you fail to pay it.
If you’re not lucky enough to get any help with your deposit and you’re still having to save hard, you could consider setting up a Lifetime ISA. This is a tax-efficient government scheme to help people save for their first property or retirement.
If you are gifted money as a deposit from say, a parent or grandparent, it will be classed as a Potentially Exempt Transfer. This means that, so long as the gifter doesn’t die within the next seven years, it will not be counted for Inheritance Tax (IHT) purposes. If the donor dies within seven years however, it’s will become a Chargeable Transfer and IHT could be applied
Inheritance tax is payable on the part of an estate worth over £325,000 at a rate of 40%. However, for the 2020/2021 tax year a 'main residence allowance' of £175,000 can be added to this ‘nil-rate-band’ bringing the total sum that can be left IHT-free to £500,000.
You can also accept a £3,000 tax-free gift allowance each year – known as your annual exemption. If you were to build up this money into a savings account over several years and use it for all or part of your deposit, you would not need to declare it to the mortgage lender as a gifted deposit – neither would it be subject to IHT.
To determine the mortgage amount you can borrow, banks and building societies look at your earnings and consider any outstanding debts you have alongside other monthly outgoings – childcare and car finance, for example.
Using a mortgage comparison tool can help you get a better idea of what kind of mortgage deals are out there for first-time buyers with a gifted deposit, and which ones you might be able to get based on your loan-to-value. When you enter this information into MoneySuperMarket’s mortgage comparison tool, you’ll be able to compare example mortgage quotes from different providers.
It can be a good idea to play around with the calculator at the top of the tool so you can get an idea of how much you might be able to afford. You’ll be able to see the monthly mortgage repayments you’d have to make for each deal, and if you click on “Product Details”, you’ll find more information on any extra moving fees you’d have to pay, and how flexible the mortgage is.
The comparison tool doesn’t take into account your financial situation or your credit history, so it’s still important to get an agreement in principle. And remember that any monthly repayments and rates you see could change when you apply for a mortgage in principle and a mortgage offer, once the financial checks have been carried out.
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