Parents must recognize gift for mortgage seekers – The Irish Times
We are first time buyers currently applying for a mortgage. Over the years, I have received gifts from my parents under the rules of the small gift exemption. I would like to put the ones I received last year to a repository.
We have been advised that a ‘gift letter’ may be requested by the bank(s) for any gifts received, as the above gifts are not independent savings and would be viewed as ‘sudden payments’ by the bank(s). banks. We have a solid family income and a good independent savings record.
I know the banks have tightened their lending rules, but is it necessary for my parents to sign this letter since these are gifts that I can choose to spend or save as I please? They are not a loan and are tax compliant.
I have to say this is new to me. However, looking at the mortgage terms and conditions of several lenders, I see that it has become another standard document required.
The ability of banks (whose recent history shows their singular failure to abide by any risk policy) to invent other tick-box exercises in an effort to protect themselves is quite ingenious. If only they would engage in proper assessment of individual circumstances rather than letting clumsy computer programs do the heavy lifting for them, perhaps that would be time better spent.
Nevertheless, that being said, it makes sense that a bank assessing a mortgage application would want to be certain that there are no unknown future liabilities.
That’s why, for example, they always want details of existing loans, even from other institutions, when you apply for a mortgage. They need to be aware not only of your income, but also of your ability to pay – and ensure they are not compromised by other financial commitments.
It’s not that the banks want to force you to use that money for the deposit – or prevent you from doing so. It’s entirely at your discretion, with no obligation on how you would use potential future gifts either. Your parents simply sign to confirm that it is a gift and not a loan.
My initial fear that the letter would commit your parents to future donations as guarantors when the bank has assessed your ability to meet the mortgage payments is unfounded. All it does is confirm that the money given to you is indeed a gift and does not involve any refund now or in the future.
I can only assume the requirement was introduced due to the growing trend of first-time buyers relying on Mom and Dad’s Bank to move up the housing ladder by increasing deposit funding. It certainly wasn’t in place the last time I applied for a mortgage.
In your case, as in the case of a growing number of families, the small gift exemption has simply become a sensible part of your family’s tax planning arrangements. When financial circumstances allow it, it makes perfect sense for the more financially well-off parents to take advantage of the exemption to help their children.
The money often helps cover childcare costs or fund vacations for young families who are usually more cash-strapped. Or, as in this case, it can be used to build up the 10% deposit you need as a first-time buyer to meet current Central Bank lending rules – an onerous task, especially in or around Dublin given current real estate prices.
As I mentioned before, each parent can give up to €3,000 to a person in a given tax year. This means that both of your parents can legitimately offer you up to €6,000 between them without being subject to tax, either for you or your parents. In fact, they could also offer up to €6,000 extra to your partner on the same basis.
Of course, the bank may look at your application – and the accompanying bank statements – and make a good judgment that it’s just relatives taking advantage of the small gift exemption, requiring no forms. of “gift letter”. But I wouldn’t bet on it.
Please send questions to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email [email protected] This column is a reading service and is not intended to replace professional advice.