Question: 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?
From Carmel in Longford.
Answer: What a nice Mum you are Carmel! First of all you do not have to die to give your daughter inheritance monies. The threshold from mother to daughter is currently €225,000 – anything over this amount attracts a 33% capital gains tax. The current Gift tax threshold is €3,000 per annum though I am not sure if anyone returns sofas and beds given to them by their parents to Revenue!
Your daughter will have to prove where the deposit originated, both to the lender and potentially Revenue. So whatever sum you are going to give her, send it electronically from your 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 generosity!
Certainly by helping out on the deposit, you will doubly help your daughter – most lenders now offer tiered mortgage interest rates… the more you pay off the property, the cheaper the rate. For instance KBC Bank’s lowest tiered rate – 60% or less – is currently the best in the market at 3.45%. Set up a current account with them and they’ll drop it to 3.25% - 0.2% for the duration of the loan.
Your daughter will still need to both justify the mortgage applied for, in terms of income capacity and ability to save. For instance if she has been living at home, paying nothing for her own maintenance just enjoying life and keeping herself in the luxury she’s hoping 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 your daughter’s case, she already has a savings record – that is good.
She will also have to comply on the income requirements for the loan sought. There are two methods used – the multiples method (up to 3½ times annual gross income – newly instigated by the Central Bank) or the Net Disposable Income (NDI) method (what you have net after tax each month – all financial monthly commitments should really not exceed c. 35% of your NDI – the balance of 65% required to have some quality of life).
She will also require independent advice on life cover – 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 – and that could be you! – should she consider taking out additional 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 she returns to work or her pension kicks in. Worth considering but would have to be budgeted for.
Buildings insurance will 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 to get the best price.
She should also shop around for the best price on 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 to have the money in her pocket!
And finally, the very best of luck to you both. It’s an exciting time. If you have any financial queries just email me (details below) and I'd be more than happy to help,
John Lowe is founder and managing director of Providence Finance Services Limited trading as Money Doctor and based in Stillorgan, Co Dublin. He is also a Personal Insolvency Practitioner & author of The Money Doctor 2015 (from Gill & Macmillan). Follow John on Twitter (@themoneydoc), Facebook & Linkedin). For consultations and seminars, T: +353 1 278 5555, e: firstname.lastname@example.org or visit www.moneydoctor.ie