Buying a home is one of life’s biggest milestones, and for many buyers, financial support from family or close friends can be essential, particularly when it comes to raising a deposit. This type of financial assistance often comes in the form of gifted funds.
While receiving a gift may seem straightforward, mortgage lenders have specific requirements to ensure the legitimacy and source of such funds. If you plan to use gifted funds, it’s essential to understand the legal and practical steps involved.
What are Gifted Funds?
Gifted funds are sums of money given—not loaned—to a homebuyer, typically to assist with the deposit or other purchase-related costs. These funds are usually provided by parents, siblings, other relatives, or close friends, with no expectation of repayment.
It’s crucial to understand that gifted funds must be true gifts with no strings attached. Lenders need to be satisfied that the funds are not a disguised loan and will not be recalled in future.
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Deed of Gift
A Deed of Gift is a formal document that confirms the financial contribution is a genuine gift. It is usually required by lenders and should include:
- The donor’s name
- The recipient’s name (the borrower)
- The amount of the gift
- The property address
- A statement confirming that no repayment is expected
- The relationship between the donor and borrower (e.g. parent, sibling, spouse)
This document helps reassure the lender that the gift does not create any financial liability for the borrower.
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Declaration of Solvency
Lenders often require a Declaration of Solvency from the donor. This is a sworn statement, signed in front of a solicitor, confirming the donor is financially able to make the gift without compromising their own financial stability.
Typically, the declaration confirms that the donor:
- Has assets exceeding their liabilities
- Can meet their debts as they fall due
- Has not been declared bankrupt, and to the best of their knowledge, is not subject to any pending bankruptcy proceedings
This declaration helps lenders ensure the donor is not at risk of insolvency, which could result in future claims on the gifted funds.
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Insolvency Act Indemnity Policy
In some cases, lenders may require an Insolvency Act Indemnity Policy. This is a type of insurance policy that protects against any claim made by the donor’s creditors if the donor becomes insolvent after gifting the funds.
- The policy is usually arranged by the borrower’s solicitor
- It relies on specific assumptions about the financial circumstances of both donor and borrower
- It is important to obtain a quote early in the process to confirm the policy is suitable and the assumptions can be met
This added protection offers lenders peace of mind that the funds will not be subject to clawback in future insolvency proceedings.
Final Thoughts
Using gifted funds can be a helpful way to get on the property ladder or move up it, but it’s essential to ensure that everything is properly documented. Lenders will require clear evidence that the gift is genuine, and that the donor is in a position to provide it.
To avoid delays or complications, speak with your solicitor and lender early in the process and make sure all required documents are in place from the outset.
Need Legal Support?
Our Real Estate Finance team has extensive experience advising on gifted funds and ensuring lender requirements are met smoothly. For more information, please contact Julia Litvinova or a member of our team at online.enquiries@la-law.com.
