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 daughter is hoping to buy her first home this year. I want to help her out by stumping up a proportion of the deposit. Will this affect her application for a mortgage though? She 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 her money towards her deposit? Would it be more tax efficient for me to gift her items for her new home, such as a sofa etc?
First of all she does not have to die to give her daughter her inheritance. The threshold from mother/father to daughter is currently € 335,000 – 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 parent though I am not sure if any “children” return sofas and 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 her Mum and Dad gives her, it is best to send it electronically from a bank account to her bank account so there is a record. Cash in a brown paper bag could be a little more difficult to prove that it is your parents’ generosity !
Certainly by helping out on the deposit, it’s a double whammy for the daughter – most lenders now offer tiered mortgage interest rates… the more you pay off the property, the cheaper the rate may be. Don’t forget too that from next January it is 4 times BOTH annual incomes… but be careful – it’s you who still have to repay the mortgage!
The daughter will still need to both justify the mortgage applied for in terms of ability to save. For instance if she has been living at home, paying nothing for her own maintenance just partying and keeping herself in the luxury she’s hopes to maintain, then she 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 daughter’s case, she already has a savings record – so that is good.
She will also have to have a good credit record ( CentralCreditRegister.ie is the only credit agency…you can check yourself – there is no charge and takes about 3 to 4 days) while also she will 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.
She will also require independent advice on life cover or mortgage protection – it is mandatory on home loans once you are under 50 years of age. Simple decreasing term should suit – this only pays out whatever the mortgage balance should she die. Only when dependents arrive should she consider taking out additional stand-alone separate life insurance. Being single and having to rely on her own income to pay for everything may prompt her to consider income protection. If for whatever reason she cannot work and she is incapacitated, that mortgage still has to be paid. This insurance pays out 75% of her monthly income less any social welfare entitlements until her return to work or her pension kicks in. There are several options but the premiums paid attract tax relief on her 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. She may want cover on what little furnishings and personal possessions she has. This can be incorporated into the insurance policy. In all cases, she 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 her pocket !