Remortgage to Give a Gifted Deposit

What Is a Gifted Deposit?

A gifted deposit is a sum of money given to a property buyer, usually by a close family member, to help them purchase a home. The key distinction from a loan is that a gifted deposit comes with no expectation of repayment and no interest in the property being purchased.

Mortgage lenders have specific requirements around gifted deposits:

• The donor must confirm it is a genuine gift — typically through a signed gifted deposit letter
• No repayment is expected — the donor has no claim on the money or the property
• The donor has no interest in the property — they are not named on the title deeds or mortgage
• The source of funds must be traceable — lenders need to see where the money came from, as part of anti-money laundering checks

Most lenders accept gifted deposits from immediate family members including parents, grandparents, siblings and sometimes aunts and uncles. Some lenders have stricter rules about who can provide a gift, so it is worth checking with a mortgage adviser before making assumptions.

The gifted deposit can form the entire deposit or supplement the buyer's own savings. A larger deposit means a lower loan-to-value ratio for the buyer, which typically opens the door to better mortgage rates and lower monthly payments.

For many families, a gifted deposit is the most practical way to help a loved one buy their first home. By remortgaging your own property, you can access the necessary funds even if you do not have the cash readily available.

How Remortgaging to Provide a Gifted Deposit Works

The process of remortgaging to raise funds for a gifted deposit is the same as any capital-raising remortgage. You switch to a new mortgage deal that allows you to borrow more than your current balance, and the additional funds are released as cash.

Establishing the amount: The first step is understanding how much deposit the buyer needs. This depends on the property they want to purchase and the minimum deposit required by their chosen lender. Most lenders require at least 5-10% of the property price, though a larger deposit of 15-25% will secure significantly better rates.

Checking your equity: You need sufficient equity in your property to raise the required amount while staying within the lender's maximum loan-to-value ratio. For example, if your home is worth £350,000 and you owe £150,000, you have £200,000 in equity. A lender offering 85% LTV would allow you to borrow up to £297,500, meaning you could potentially release up to £147,500.

Finding the right deal: A mortgage adviser will search the market for remortgage deals that suit your circumstances. Factors to consider include the interest rate, arrangement fees, the length of any fixed or discounted period, and any early repayment charges.

Coordinating timing: Ideally, your remortgage should complete before or at the same time as the buyer's purchase. This requires coordination between both sets of solicitors and mortgage advisers. Delays on either side can cause complications, so starting the process early is advisable.

Providing the gift: Once your remortgage completes, you transfer the funds to the buyer or directly to their solicitor. The buyer's solicitor will require the signed gifted deposit letter and evidence of where the funds came from as part of the conveyancing process.

Gifted Deposit Letters and Anti-Money Laundering

Lenders and solicitors have strict requirements around gifted deposits, primarily driven by anti-money laundering (AML) regulations. Understanding what is needed upfront can save time and avoid delays during the purchase process.

The gifted deposit letter: This is a formal letter from the donor confirming several key points. While exact requirements vary between lenders, the letter typically needs to state:

• The donor's full name and address
• The relationship between the donor and the buyer
• The exact amount being gifted
• Confirmation that the money is a gift with no expectation of repayment
• Confirmation that the donor has no interest in or claim on the property being purchased
• The donor's signature and date

Some lenders have their own template for this letter, while others accept any format that covers the required information. Your mortgage adviser or the buyer's solicitor can provide guidance on what is needed.

Source of funds evidence: The buyer's solicitor is legally required to verify the source of the gifted deposit as part of their anti-money laundering obligations. This means you will need to provide documentation showing where the money came from.

If the funds are from a remortgage, the solicitor will typically need to see your mortgage offer and completion statement, along with bank statements showing the money arriving in your account and being transferred to the buyer. This creates a clear paper trail that satisfies the legal requirements.

If you are releasing funds from a remortgage specifically to provide a gifted deposit, the paper trail is usually straightforward. However, if the money has passed through several accounts or been held for a long time, additional documentation may be requested. Being organised and transparent throughout the process makes everything smoother for everyone involved.

Tax Implications of Gifting a Deposit

Giving a family member a large sum of money can have tax consequences that are important to understand before you proceed. While there is no gift tax in the UK as such, inheritance tax rules may apply.

Inheritance tax (IHT): If you give a gift and pass away within seven years, the gift may be included in your estate for inheritance tax purposes. This is known as a potentially exempt transfer (PET). The full value is taxable if death occurs within three years, with the rate tapering over the remaining four years.

However, several exemptions can reduce or eliminate the IHT liability:

• Annual exemption — you can give away £3,000 per tax year without any IHT implications. If you did not use the previous year's allowance, you can carry it forward for one year, giving a potential £6,000 exemption
• Small gifts — you can make gifts of up to £250 to any number of individuals per tax year
• Wedding gifts — parents can gift up to £5,000 on the occasion of their child's marriage or civil partnership
• Normal expenditure out of income — if you can demonstrate that a gift comes from your regular income and does not affect your standard of living, it may be exempt regardless of the amount

Capital gains tax: This is not typically relevant when gifting cash from a remortgage, but could apply if you were transferring property or other assets instead.

Stamp duty: If you are giving the deposit but are not named on the buyer's mortgage or property title, there are no stamp duty implications for you. However, if you were to be named as a joint owner and you already own a property, the higher rate of stamp duty could apply to the purchase.

Given the potential complexities, consulting a qualified tax adviser before making a large gift is strongly recommended. They can help you structure the gift in the most tax-efficient way and ensure you understand any future liabilities.

Risks and Important Considerations

Providing a gifted deposit through remortgaging is a significant financial decision that affects both you and the person receiving the gift. Consider these factors carefully before proceeding.

You are increasing your own debt. Remortgaging to raise funds means higher monthly mortgage payments for you. Make sure you can comfortably afford the increase, even if your circumstances change. Consider what would happen if you lost your job, became ill, or interest rates rose significantly when your fixed period ends.

The gift is irrecoverable. Once you give the money, it belongs to the buyer. If their relationship breaks down and the property is sold, your gift may be divided between the separating parties. A declaration of trust or a deed of trust drawn up at the time of purchase can help protect the gifted amount, particularly if the buyer is purchasing with a partner.

Fairness among family members. If you have more than one child or close relative, consider how giving a deposit to one will be perceived by others. Many families address this by planning to make equivalent gifts to other children in the future, or by reflecting the imbalance in their will.

Impact on your retirement. If you are in your 50s or 60s when remortgaging, the additional debt could extend beyond your retirement date. Ensuring you can manage the payments on a pension income is essential.

Property market risks. If the buyer's property decreases in value, the gifted deposit cannot be recovered through a sale. Similarly, if your own property falls in value, you could find yourself with a higher loan-to-value ratio than anticipated on a larger mortgage.

Taking independent financial advice and having honest conversations with the recipient about expectations and protections is the best way to ensure the arrangement works for everyone.

Alternatives to Remortgaging for a Gifted Deposit

Remortgaging is not the only way to provide a gifted deposit. Depending on your circumstances, other approaches might be more suitable or could be used alongside a remortgage.

Savings: If you have accessible savings, using these avoids the need to increase your mortgage. However, ensure you retain an adequate emergency fund for your own needs.

Further advance: Your existing lender may offer additional borrowing on your current mortgage without requiring a full remortgage. This can be quicker and avoid early repayment charges, though the rate may not be the most competitive.

Secured loan: A second charge mortgage allows you to borrow against your equity without changing your first mortgage. This can be useful if you have an attractive rate on your current deal that you do not want to lose.

Guarantor mortgage: Instead of providing a cash deposit, you could act as a guarantor on the buyer's mortgage. Some lenders offer products where your property or savings are used as additional security, helping the buyer borrow more or access better rates without you releasing cash.

Family springboard mortgages: Certain lenders offer products specifically designed for family support. These typically involve a family member placing a sum in a linked savings account for a set period, after which it is returned with interest. The buyer gets a mortgage without needing a traditional deposit.

Joint borrower sole proprietor mortgages: These allow you to be on the mortgage (boosting borrowing power) without being named on the property title. This avoids additional stamp duty charges while increasing the amount the buyer can borrow.

Each option has different implications for your finances, your tax position and your legal relationship with the property. A mortgage adviser can explain the pros and cons of each approach and help you find the best solution for your family's situation.