John Lowe of Money Doctors.ie regularly receives queries from parents on a variety of financial issues concerning their children. Erma Bombeck the American humourist once stated children make your life important so when the thorny issue of gifting money to your son or daughter to buy their first property crops up, doing it the right way can make all the difference. 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 applicimation for a mortgage though? 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 etc?
First of all you do not have to die to give your son or daughter their inheritance. The threshold from mother/father to daughter 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 though I am not sure if any “children” return sofas, TVs or beds given to them by their parents to Revenue! This exemption is actually available to anyone not just from parent to child…
The daughter or son though will have to prove where the deposit originated both to the lender and potentially Revenue. So whatever sum the Mum and Dad gives him, it is best to send it electronically from a bank account to his 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… the more you pay off the property, the cheaper the mortgage interest rate may be. Don’t forget too that it is 4 times BOTH applicants’ annual incomes… 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 just partying and keeping himself in the luxury he hopes to maintain, 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 ( CentralCreditRegister.ie is the only credit agency…you can check yourself – email them for a report ..there is no charge and takes about 3 to 4 days) while he will also have to comply on the income requirements for the loan sought. I like to use or prefer 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. 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. 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. Better in his pocket ! 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 € 000s..best wishes.