Financial tips for helping your child with their house deposit
In my work I regularly receive queries from parents on a variety of financial issues concerning their children.
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? She has a savings record but my contribution will be about half of the required deposit. Will banks take a dim view of this?"
You might also be asking what the tax implications are of giving your child money towards her deposit, and whether it would be more tax efficient to gift her items for her new home?
First of all, a parent does not have to die to give a daughter her 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 exemption - this is separate from an inheritance - threshold is €3,000 each year. 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 give her, it is best to send it electronically from a bank account to her bank account so there is a record.
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 mortgage interest rate may be.
Don’t forget, too, that it is four times both annual incomes for first-time buyers – but be careful – it’s you who still has to repay the mortgage!
The daughter will still need to justify the mortgage applied for in terms of her ability to save. For instance, if she has been living at home, paying nothing for her own maintenance, then she may be in for a shock when those repayments start.
Lenders like to see some regular savings 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 – that is good. She should be at least saving the mortgage repayment amount every month, and ideally for at least six months.
She will also have to have a good credit record, which you can check online. She will also have to comply with the income requirements for the loan sought – four times both annual incomes.
I like to use the Net Disposable Income (NDI) method (calculated as what you have net after tax each month), as 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 or mortgage protection – it is mandatory on all home loans.
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 gross monthly income less any social welfare entitlements until her return to work or her pension kicks in, whichever is the sooner.
There are several options, but the premiums paid attract tax relief on her marginal rate, so receiving 40% from the government on every payment made – the only insurance policy that does outside of non-assignable life cover within a pension plan. It is 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 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!
The views expressed here are those of the author and do not represent or reflect the views of RTÉ
For more information, click on John Lowe's profile above or on his website.
