With the country in the midst of a housing crisis, securing your own home is still a top priority for many young people. While not every family will be able to do so, some parents will want to help their children by contributing a portion of the deposit.
John Lowe of MoneyDoctors.ie shares his advice on gifting your children money toward their home deposit.
As a financial expert, I regularly receive queries from parents on a variety of financial issues concerning their children. The following question is a typical example from one concerned parent sent recently to me:
"My son Andrew is hoping to buy his first home this year. I want to help him out by stumping up a proportion of the deposit. Will this affect his application for a mortgage? He has a savings record but my contribution will be about half of the required deposit. Will banks take a dim view of this? Also, what are the tax implications of me giving him money towards his deposit? Would it be more tax efficient for me to gift him items for his new home, such as a sofa or TV?"
First thing to know is that you do not have to die to give your son or daughter their inheritance. The threshold from mother/father to their child is currently €400,000 – anything over this amount attracts a 33% Capital Acquisition Tax.
The current gift tax – this is separate to an inheritance – threshold is €3,000 each year per person. This exemption is actually available to anyone, not just from parent to child.
However, in this example the son will have to prove where the deposit originated, both to the lender and potentially to Revenue. So whatever sum Mum and Dad gives him, it is best to send it electronically from a bank account to the son's bank account so there is a record. Cash in a brown paper bag could be a little more difficult to prove that it came from your parents' generosity!
Certainly by helping out on the deposit, it’s a double whammy for the son – most lenders now offer tiered mortgage interest rates where the more you pay off the property, the cheaper the mortgage interest rate may be. Don’t forget too that it is four times both applicants’ annual incomes, if buying with a partner or spouse, but be careful – it’s you who still have to repay the mortgage.
The son will still need to both justify the mortgage applied for in terms of ability to save. For instance if he has been living at home, paying nothing for his own maintenance, then he may be in for a shock when those repayments start.
Lenders like to see some regular saving going on for precisely that reason: that it’s not a shock to the system. In this son’s case, he already has a savings record – so that is good.
He will also have to have a good credit record (you can check your record on the CentralCreditRegister.ie for free) while he will also have to comply on the income requirements for the loan sought. I like to use the Net Disposable Income (NDI) method (what you have net after tax each month) as all financial monthly commitments should not exceed c. 35% of your NDI – the balance of 65% is to live some quality of life.
He will also require independent advice on life cover or mortgage protection – it is mandatory on home loans at any age. A simple decreasing term should suit – this only pays out whatever the mortgage balance should he die. Only when dependents arrive should he consider taking out additional stand-alone separate life insurance for those dependent’s benefit.
Being single and having to rely on his own income to pay for everything may prompt him to consider income protection. If for whatever reason he cannot work and he is incapacitated, that mortgage still has to be paid. This permanent health insurance pays out 75% of his monthly income less any social welfare entitlements until his return to work or his pension kicks in.
There are several options but the premiums paid attract tax relief on his marginal rate – the only insurance policy that does outside of non-assignable life cover within a pension plan. It is worth considering but would have to be budgeted for.
Finally buildings insurance will also be needed and the lender’s interest noted on the policy. He may want cover on what little furnishings and personal possessions he has. This can be incorporated into the insurance policy. In all cases, he should shop around for this.
Shopping around also should include the legal fees – simply because so and so has looked after generations of your family down the years is no longer acceptable if they are more expensive.
And finally, if you your son has not made a Will at this stage, advise him this is the time to do it. Even a DIY low-lost Will package without having to resort to a solicitor’s office will save him thousands.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ
For more information, click on John Lowe's profile above or on his website.
