When the thorny issue of gifting money to your child to buy their first property crops up, doing it the right way can make all the difference.
Here, John Lowe of MoneyDoctors.ie explains some of the common obstacles and queries on gifting money to your children by airing a typical example from a concerned parent:
"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 lenders take a dim view of this? Also, what are the tax implications of my giving her money toward her deposit? Would it be more tax efficient for me to gift her items for her new home, such as a sofa, etc?" - Annette, Clonmel.
First of all, you do not have to die to give your child inheritance monies. The threshold from parent to child is currently €335,000 – anything over this amount attracts a 33% capital acquisition tax (CAT). The current gift tax threshold is €3,000 per annum per parent.
Your child will have to prove where the deposit originated both to the lender and potentially to Revenue. So, whatever sum you are going to give them, send it electronically from your bank account to their bank account so that there is a record. You may also need to complete a lender's template for such gifts – 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 child – most lenders now offer tiered mortgage interest rates: the more you pay off the property, the cheaper the rate. The maximum threshold for this is a 90% loan.
Your child will also still need to justify the mortgage applied for in terms of income capacity and ability to save. For instance, if they have been living at home, paying nothing for their own maintenance, then she may be in for a shock when those repayments start!
Lenders like to see some regular saving for at least in the amount of the mortgage sought going on for precisely that reason – that it’s not a shock to the system. In Annette's daughter's case, she already has a savings record, so that is good.
She will also have to comply with the income requirements for the loan sought. There are two methods used – the multiples method (up to four times annual gross income for first-time buyers) or the Net Disposable Income (NDI) method (what you have net after tax each month, where all financial monthly commitments should not exceed roughly 35% of your NDI – the balance of 65% is to live 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. A simple decreasing term should suit – this only pays out whatever the mortgage balance should she die. Only when dependents arrive or she has to take care of her parents 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 – making it the only insurance policy that does outside of non-assignable life cover within a pension plan – at her marginal rate. This is worth considering but would have to be budgeted for.
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 quote the normal fee and are more expensive. Better in her pocket! Best of luck to you both.
For more information click on John Lowe's profile above or on his website.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ.