Your guide to giving your kids money
Children make your life important. So when the thorny issue of giving your son or daughter money to buy their first property arises, doing it the right way can make all the difference.
Take this scenario for example: a girl hopes to buy her first house this year. His mother wants to help him by buying back part of the deposit. Will this affect his mortgage application?
She has a savings record but my contribution will be about half of the required deposit. Will the banks take a dim view of this? What are the tax implications also if I give him money for his deposit? Would it be more tax efficient for me to give him items for his new home like a sofa etc. ?
First of all, a parent does not have to die to give his inheritance to his child. The mother / father to child threshold is currently € 335,000 – any amount above this amount results in a 33% capital acquisition tax. The current threshold for donation rights – separate from the CAT – is € 3,000 per year and per parent.
The girl will have to prove where the deposit came from both for the lender and potentially for the income. So no matter how much money his mother gives him, it is better to send it electronically from a bank account to his bank account so that there is a record. The cash in a brown paper bag might be a little harder to prove it’s mom’s bounty!
Granted, helping out on the deposit is a double whammy for the girl – most lenders now offer tiered mortgage interest rates: the more you pay off the property, the lower the rate can be. For example, KBC Bank’s staggered rate for new borrowers and money changers – 60% or less – is 2.25% for 3-year fixed rates. The 3-year fixed rate for 90% loans is 2.35%.
The girl will still have to justify the mortgage requested both in terms of income capacity and savings capacity. For example, if she has lived at home, paying nothing for her upkeep, just partying and keeping herself in the luxuries that she hopes to maintain, then she might be shocked when those repayments begin!
Lenders like to see regular savings being made for precisely this reason – that it does not come as a shock to the system. In this girl’s case, she already has a savings record – so that’s good.
She will also need to have a good credit history (ICB.ie and CentralCreditRegister.ie are the 2 credit agencies; you can check yourself – there is no charge) while still having to comply with 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 – not all monthly financial commitments have to be made. exceed about 35% of your NDI – the balance of 65% is living a certain quality of life).
She will also need independent advice on life coverage or mortgage protection – this is mandatory for home loans once you are under 50. A simple decreasing term should be fine – this only pays off the mortgage balance in the event of death. It is only when dependents arrive that she should consider purchasing additional separate life insurance.
Being single and having to rely on her own income to pay for everything may encourage her to consider income protection. If for some reason she cannot work and becomes incapacitated, that mortgage still has to be paid. This insurance pays out 75% of his monthly income less social protection rights until he returns to work or retires.
There are several options, but the premiums paid get tax relief on its marginal rate – the only insurance policy that offers non-transferable non-life coverage within a pension plan. It is worth considering but should be budgeted for.
Finally, building insurance will also be necessary and the lender’s interest noted on the policy. She may want to cover what little furniture and personal effects she has. This can be incorporated into the insurance policy. Either way, she should shop around for it.
Shopping should also include legal fees – just because such has taken care of generations of your family over the years is no longer acceptable if they are more expensive. Better in his pocket!