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.
Take this scenario for example: A daughter is hoping to buy her first home this year. Her mother wants 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, a parent does not have to die to give their child their inheritance. The threshold from mother/father to child is currently €335,000 – anything over this amount attracts a 33% Capital Acquisition Tax. The current gift tax - which is separate to CAT - threshold is €3,000 each year per parent.
The daughter will have to prove where the deposit originated both to the lender and potentially Revenue. So whatever sum her mum gives her, it is best to send it electronically from a bank account to their bank account so there is a record. Cash in a brown paper bag could be a little more difficult to prove that it is Mum's 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. For instance KBC Bank’s tiered rate for new borrowers and switchers – 60% or less – is 2.25% for 3 year fixed rates. The 3 year fixed rate for 90% loans is 2.35%.
The daughter will still need to justify the mortgage applied for both 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 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 (ICB.ie and CentralCreditRegister.ie are the 2 credit agencies; you can check yourself – there is no charge) while also she will 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) or the Net Disposable Income (NDI) method (what you have net after tax each month – 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!