Assisting child with house purchase

[EmmDee]

All,

I'd be interested in views. My 22 year old child is interested in planning to purchase a house / apartment to move out. They have discussed plans and I'd like to assist in a way that doesn't cause unintended tax problems. I'd also like them to have ownership of the planning and organising as much as possible. All numbers quoted are examples rather than exact;

- Child is self employed but works for three sperate groups providing a type of teaching / training for kids (not school based) - even in current situation they are busy but operating at about half expected normal output. Would expect to be working fully (5-6 days a week) once "in person" children's activities are allowed to resume
- In normal circumstances would be able to afford mortgage repayment on approx €160k mortgage but the fact that they have a limited work history (only out of college 9 months but was doing this part time while in college) and are not PAYE, would presumably restrict mortgage applications
- They anticipate to be able to save €40k deposit by September 2022 and would like to look for own place for about €200k at that time. They already have a significant portion of that saved and have minmal expenses currently. So even in restricted environment are saving.

My initial thoughts were;
1) Joint ownership with mortgage application (with or without mortgage - both possible). But am wary of added complexity of tax situation for me
2) Act as guarantor for their mortgage application (I'd be ok with that) but unsure if guarantees are still accepted
3) Forget about them applying for a mortagage and for me to lend them the full amount (and have them pay me back the same as with a mortgage)
4) A variation of (3) where I top up their deposit to make a mortgage application more achievable but again format as a loan to avoid gift tax

The advantage of (2) or (4) for me is that they have to deal with the bank and manage a deal with the mortgage on their own - both to build up a history but also take ownership in the financial dealings with the bank

I'd be interested in reactions or suggestions

Thanks

 

[NoRegretsCoyote]

3) Forget about them applying for a mortagage and for me to lend them the full amount (and have them pay me back the same as with a mortgage)

What is your opportunity cost? Do you have the full amount sitting on deposit? Or would it mean passing up other investment opportunities?

- In normal circumstances would be able to afford mortgage repayment on approx €160k mortgage but the fact that they have a limited work history (only out of college 9 months but was doing this part time while in college) and are not PAYE, would presumably restrict mortgage applications

This looks like an income north of €40k which is amazing for a 22 year old who is self employed. I've never worked in mortgage underwriting, but I suspect this application would get a bit more scrutiny, as it is not a typical income for someone of that age.

 

[RedOnion]

Some initial thoughts:

Firstly, in my opinion 22 is very young to be considering buying a house, and deciding where your 'permanent' home is going to be. But that's just me.

Another consideration - if you've more than 1 child, will you be able to repeat the same level of support for the others?

Practicalities:
As they're self employed, in terms of mortgage application, they'd generally need to have 2 years of accounts to support the application. This might determine earliest timelines. Nobody really knows yet how underwriting might change post Covid.

To give an idea, here's the UB criteria for self employed:
" - latest 3 months’ consecutive personal bank statements verifying expenditure and
- latest 3 months’ consecutive business bank statements (If business account is not with the Bank) and
- 2 years finalised accounts AND
- Tax Assessment forms confirming 2 years Key Data (must include tax returns and Revenue acceptance forms)"

As there's lots of time, it'd be worth coming up with a clear plan, and put lots of financial discipline in place now to make a mortgage application go smoother; e.g. show regular savings history; budget for big annual spends like car insurance, so they're not 'dipping into' their savings to pay for them.

1) Joint ownership with mortgage application (with or without mortgage - both possible). But am wary of added complexity of tax situation for me

It's not just the Tax to consider. This would be treated in most circumstances as a BTL mortgage for you, so BTL interest rates would apply.
It would also invalidate any (if they exist) help to buy type grants / tax rebates.

2) Act as guarantor for their mortgage application (I'd be ok with that) but unsure if guarantees are still accepted

My understanding is that they're not used anymore. As well as banks moving away from them, the income for the CBI lending limits only includes that of the borrowers, so being a guarantor doesn't change that.

3) Forget about them applying for a mortagage and for me to lend them the full amount (and have them pay me back the same as with a mortgage)

To work in practice, you both need discipline, and make it a regular monthly repayment. Not the first thing they stop if they get under pressure.
Apart from that, your relationship is important - how much independence would your child really have to make decisions that might be different if they had a mortgage?

I've only known a very small number of people where their parents financed their first house purchases, and in one case they ended up living somewhere they didn't want to, because of the influence their parents had in the decision.

4) A variation of (3) where I top up their deposit to make a mortgage application more achievable but again format as a loan to avoid gift tax

This is the approach most commonly taken in practice. You might need to sign a letter for the bank saying it's a gift, but that doesn't stop it being a loan.

both to build up a history but also take ownership in the financial dealings with the bank

The ownership / independence would be the most important thing. You don't really build up a history of credit in Ireland, (unless it's a bad one!)

 

[Brendan Burgess]

September 2022 and would like to look for own place for about €200k at that time.

I think that this is the key. That is 18 months away. No harm in planning ahead, but don't set anything in stone. Much can change in the meantime. He might lose interest in the business. He suddenly realises that all those profits were subject to tax and he has to pay his tax. He might be far more profitable than he is now and decide that he wants a €300k house.

I doubt that he will get any mortgage in 2022 as he won't have the earnings record. But the lending environment may change as well: A new lender might come in who lends on the strength of parental guarantees.

So you should tell him that you will help him when he is ready to buy.

If he wants to move out, then you could always buy the house yourself and let him live in it free of charge. When he is ready, he can buy it from you. There will be some legal expenses and stamp duty, but these won't be that significant. If it rises in value, there will be CGT to pay on it.

Don't worry about gift tax. You can give him €335k without any tax implications.

Brendan

 

[EmmDee]

Thanks all...

What is your opportunity cost? Do you have the full amount sitting on deposit? Or would it mean passing up other investment opportunities?

This looks like an income north of €40k which is amazing for a 22 year old who is self employed. I've never worked in mortgage underwriting, but I suspect this application would get a bit more scrutiny, as it is not a typical income for someone of that age.

I don't have any pending investments or other live considerations. I'm beyond my revenue threshold on pension contributions as my 8% is topped up to 20% and from next year if I increase to 12% they will top up to 30% - so really I think the pension will be adequate for my long term needs.

We were thinking about buying an aprtment for the long term but didn't fancy the complexity of being a landlord.

Affordability is improved because they will move in with their partner - but personally would prefer if they avoided joint ownership at this stage (and the partner wouldn't add much to a mortgage application at the moment)

Some initial thoughts:

Firstly, in my opinion 22 is very young to be considering buying a house, and deciding where your 'permanent' home is going to be. But that's just me.

Another consideration - if you've more than 1 child, will you be able to repeat the same level of support for the others?

As there's lots of time, it'd be worth coming up with a clear plan, and put lots of financial discipline in place now to make a mortgage application go smoother; e.g. show regular savings history; budget for big annual spends like car insurance, so they're not 'dipping into' their savings to pay for them.

It's not just the Tax to consider. This would be treated in most circumstances as a BTL mortgage for you, so BTL interest rates would apply.
It would also invalidate any (if they exist) help to buy type grants / tax rebates.

To work in practice, you both need discipline, and make it a regular monthly repayment. Not the first thing they stop if they get under pressure.
Apart from that, your relationship is important - how much independence would your child really have to make decisions that might be different if they had a mortgage?

I've only known a very small number of people where their parents financed their first house purchases, and in one case they ended up living somewhere they didn't want to, because of the influence their parents had in the decision.

Thanks - some good points to keep in mind. We do have an older child who lives in Europe. Anything we do we will discuss with the older child and make the same offer (or at least let them know that the same optiosn would be available to them). Would definitely look to be equitable.

Any choice of house is theirs - I wouldn't want to get involved in deciding that. Happy to give thoughts or advice but as far as I am concerned, it would have to be their decision to balance affordability with location and size and all those factors. Likewise, if we were to loan funds, it would be documented and paid automatically - like any busines transaction. The discipline is what's important which is why I think we'd both prefer to get a mortgage. But if I step in, it will be as a proxy bank rather than "ad hoc" repayments. In fairness I think they would look to get a mortgage and repay early rather than rely on a loan

Good point on the BTL - would probably avoid getting my own mortgage if I can

If he wants to move out, then you could always buy the house yourself and let him live in it free of charge. When he is ready, he can buy it from you. There will be some legal expenses and stamp duty, but these won't be that significant. If it rises in value, there will be CGT to pay on it.

Don't worry about gift tax. You can give him €335k without any tax implications.

Brendan

Thanks Brendan - another option there with us buying it initially. I'll keep that in mind.

The €335k is the lifetime inheritance threshold right?

 

[NoRegretsCoyote]

@EmmDee

I think you see this as a "starter" home, and your child will want to live somewhere else long term. Just bear in mind that the Central Bank rules mean that they will need a 20% deposit when they want to trade up. So a first-time purchase could work against them at a future point if they have the income to borrow big but don't have the equity at the time.

Otherwise I think a <€200k apartment for a child to live in on a low rent would be a pretty good use of your wealth, and also a way to help them save for their own purchase down the line.

 

[EmmDee]

@EmmDee

I think you see this as a "starter" home, and your child will want to live somewhere else long term. Just bear in mind that the Central Bank rules mean that they will need a 20% deposit when they want to trade up. So a first-time purchase could work against them at a future point if they have the income to borrow big but don't have the equity at the time.

Otherwise I think a <€200k apartment for a child to live in on a low rent would be a pretty good use of your wealth, and also a way to help them save for their own purchase down the line.

A fair point. I think some of the logic on their behalf is the differential between a mortgage and rent on an equivalent property. I understand it - ownership with the potential to pay off quicker is significantly cheaper than rent in Dublin (and I can understand the desire to move out of home and have your own place at that age)

It's a different dynamic for the older child who lives in a city where rent is about half of what is here and ownership is more expensive - the inverse of here

 

[NoRegretsCoyote]

@EmmDee

I agree. I don't see much downside with apartments in Ireland as an asset class. They are pretty liquid, and you can easily let one if you don't need it for yourself. I don't think property in general is overvalued either, but that's a slightly different issue.

If I was in your shoes I would very much help a child with an apartment purchase. I would steer well clear of a house both on cost and suitability grounds.