Jill Kerby

DOWNPAYMENTS ARE NOT RISK-FREE…FOR PARENTS

How far can parents or families go to help their adult children financially?

The answer is, not as far as they would have had to go had the Central Bank not relented on its 20% down-payment proposal for all new property buyers.

Under the new borrowing regulation, if a (grand)son/daughter, for example, wants to buy a house worth more than €220,000 – the maximum value at which a 10% down-payment will be permitted – then you may still be tempted (or beseeched) to give them a financial helping hand:  the new ruling requires a 20% down-payment on any purchase balance over €220,000.

For example, if the property is valued at €300,000, the buyer will be required to put down €22,000 (€220,000 x 10%) plus €16,000 (€80,000 x 20%) for a total down payment of €38,000.

Parents or grandparents in a position to give down-payment assistance should consider the banking and legal limitations to their act of generosity and their own personal financial limitations.

LENDERS

First, lending banks are unlikely to object to the down payment being gifted so long as the borrower can comfortably repay the loan (now at income-to value of 3.5 times.) The banks want to see a steady track record of regular savings and/or payment of rent equal or exceeding the proposed mortgage payment and will demand at least a year’s worth of bank statements; outstanding personal loans and multiple credit cards will work against the borrower. On-line gambling accounts are a definite no-no.

A poor credit bureau record (see ICB.ie) will also ruin any chance of a mortgage, no matter how the down payment is secured.

GIFT LAW

The current tax-free gift and inheritance threshold between a parent and child is €225,000 over the child’s lifetime. (It was €521,000 in 2008) If the child has not already used up that threshold, a €38,000 down payment gift will be entirely tax-free. A grandparent however, is restricted to giving a tax-free gift of no more than €30,150 (unless the child’s parents are already deceased). And balance over the thresholds is subject to 33% capital acquisition tax.

If the parent/grandparent doesn’t have the resources to give a large lump sum, but still wants to help their young relative, they can always gift an annual tax-free sum of €3,000 that falls outside the CAT net altogether.

This €3,000 a year can be given to anyone, regardless of their relationship. A (grand)child and their partner, whether married or not, could be given €3,000 each. This will certainly speed up the accumulation of a large down payment.  (Even at a saving rate of €500 a month, or €6,000 a year, it will take approximately six years and four months to save a €38,000. Tax-free gifts of another €6,000 a year will cut the saving period in half (assuming you can still find a similar property at the same price three years later.)

YOUR CIRCUMSTANCES

Irish parents and grandparents, in my experience, have been extremely generous in their financial assistance, and sometimes to their own detriment where mortgage guarantees have been concerned.  Depleted savings and pension funds (that still haven’t been restored) have been the other consequence of helping adult children onto inflated boom time property ladders.

Before you assist in securing a mortgage for your relative (and this could include existing owners who want to trade up but don’t have at least 20% equity in their home) you need to review your own finances and ask the following questions:

-       What is the value of my/our pension fund(s)? What projected income will it produce at retirement age?

-       If I am a member of a defined benefit (DB) pension, is it fully funded?  If not what are the chances that my/our retirement income will be cut?

-       If I am still employed and this cash gift comes from savings, will I still have sufficient cash left to meet at least 3-6 months worth of our monthly expenditure, if needed?

-       Can I make a similar value gift to my other children?

Relying on families to get a young person on the property ladder is a reality and wealthier families will still be able to short-circuit the new regulations since the banks can exceed the 80% limit and the 3.5 time income limit for 15% and 20% respectively of all its lending in any given year.

But it doesn’t come without risks for both parties: when the new baby comes along, when a wage is cut, or illness strikes, it may not be as easy to repay the mortgage as it was to put together the downpayment.

What these new regulations really show is that we need new savings products with higher deposit yields and lower tax.  An Irish ISA would fit the bill perfectly.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.