Friday 21 September 2018

The dos and don'ts of coming up with the deposit for a home

With rent and house prices rocketing, first-time buyers could be saving for decades to get the deposit together, writes Louise McBride

Saving up a deposit has become one of the biggest challenges facing young people today. Stock image
Saving up a deposit has become one of the biggest challenges facing young people today. Stock image
Louise McBride

Louise McBride

As house buyers could need a deposit of almost €60,000 to buy a home, saving up a deposit has become one of the biggest challenges facing young people today. First-time buyers typically need a deposit equivalent to a tenth of the value of their home. The average asking price of a home nationwide is almost €250,000, according to Daft - but that rises to almost €590,000 in south county Dublin.

Soaring house prices have added to the challenge - the longer it takes to get the deposit together for a home, the more likely a house hunter is to be priced out of a particular area.

Here are some steps to help you get the deposit together for your home as quickly as possible.

MOVE BACK HOME

With rents soaring past Celtic Tiger highs, it could take decades to save up the deposit for a home while renting. For this reason, it makes sense to move back home with your parents if saving for a deposit. "There's an increasing incidence of people moving back home with their parents so they can save for the deposit," said Trevor Grant, chairman of the Association of Expert Mortgage Advisers (AEMA). "Even if you are a couple without any children or short-term loans, the cost of rent makes it very hard to save up for the deposit."

Should your parents have a second property, you may be more tempted to live there rent-free, rather than in the family home, while you save up for your deposit. Be aware you could trigger a tax bill for yourself in doing so. Revenue would consider the free use of that second property to be a gift which you have received from your parents and you may have to pay tax on that gift - particularly if you have already received valuable gifts from your parents, or if you receive valuable gifts or inheritances from them in the future.

No gift tax, however, would be triggered by children living rent-free in a second property owned by their parents - if the child is under the age of 18, or is no more than 25 years of age and attending college. A gift tax bill would not be triggered either if you (and your spouse or partner) were living free of board with your parents in the family home.

GET A HANDOUT

Many children have turned to their parents for help with the house deposit. "The vast majority of first-time buyers are getting gifts [of money] from their parents towards the deposit," said Grant. "I've seen cases where some of the gifts are for the full deposit."

Should you be getting a gift of money towards your deposit, all lenders now require you to have a gift letter from the donor. That letter specifies the sum of money being gifted, the name of the donor, and a signature from the donor confirming that you do not need to repay the money gifted - and that the donor has no recourse to the property.

There may be tax implications if you receive a handout from your parents towards your deposit. You must typically pay gift or inheritance tax at a rate of 33pc on the value of any gifts or inheritances received - though there are cases where there are exemptions from the tax. Under the parent-to-child tax-free threshold for inheritance and gift tax, a child can get gifts or inheritances worth up to €310,000 tax-free from their parents over their lifetime. A handout received from your parents towards your deposit could therefore trigger a tax bill for you if that handout pushes the total value of the gifts and inheritances received from your parents over that threshold.

To avoid having a handout trigger a tax bill, ask your parents to work within the small gift exemption. With that exemption, each parent can give a gift to a value of €3,000 to a child (or to anyone else) each year without triggering gift tax. So two parents can make tax-free gifts to a child to the value of €6,000 in any year. Indeed, two parents could gift €12,000 in total each year to each son or daughter and their respective partner (such as a fiancee, fiance, daughter-in-law or son-in-law) without triggering tax. So should you be buying a home with a partner or husband, under the small gift exemption, you and your partner could receive €12,000 in total a year tax-free from your parents towards the deposit on your home.

Gifts which qualify for the small gifts exemption do not eat into the parent-to-child tax-free threshold. Furthermore, there is no obligation to spend the gift received under the small gift exemption in the year it is received. You could therefore save that gift until you need it for the deposit. Should your parents wish to give you a large handout towards your deposit (such as €20,000 or more), it would be wise for them to drip-feed that handout over a number of years so that the small gift exemption could be fully taken advantage of and no tax bill would be triggered.

START SAVING NOW

The earlier you start to save up regularly for your deposit, and the fussier you are about the account you choose, the better. Boost the amount you can save by cutting back on luxuries and leading a cheaper lifestyle. Save into an account which pays better interest than normal. Regular savings accounts typically pay better interest than lump sum deposit accounts - as long as you choose an account which pays more than 1pc interest.

Some of the best regular savings accounts are EBS's Family Savings (which pays 1.75pc interest in the first year), KBC's Bonus Regular Saver (1.5pc interest on up to €50,000 of savings) and Bank of Ireland's Mortgage Saver (1.35pc interest on up to €14,999 of savings). The Mortgage Saver account also pays bonus interest of €2,000 once the buyer has more than €5,000 saved into their account, though there is a catch: the mortgage must be drawn down with Bank of Ireland within 30 months of opening the account. You could find a cheaper mortgage with another lender.

Should you plan to save for more than five years for your deposit, do so through a life assurance savings account rather than a traditional deposit account as returns are likely to be higher, according to Eoin McGee, principal of Kildare-based financial advisers Prosperous Financial Planning.

Some of the life assurance savings plans recommended by McGee include Zurich Life's Easy Access Savings, Aviva's Regular Saver and Irish Life's Pinnacle. Be sure to understand the charges on a life assurance plan before signing up to one, though.

COMMUTER BELT MOVE

Many first-time buyers have their hearts set on buying in a particular area - but are quickly forced to look elsewhere due to runaway prices. Moving to the commuter belt, or a neighbouring county, could make it easier for you to afford a home, and get the deposit together. Know what you're getting into before making such a move though. "Think about how you will commute to work - and how practical the commute is," said Grant. "Be sure that it's a commute you can stick to. Your property purchasing power is based on your salary and if your commute makes it a struggle to get to work, you could be risking your salary."

Be aware too that moving away from family and friends can be difficult. "If you have children, or are thinking of having children, ask what kind of support network you will have around you in your home," said Grant. "Otherwise, your home could be a very lonely place. You need to ask yourself what kind of support you would have if you or your children fall sick."

DEPOSIT NO-NO'S

DON’T COUNT ON A SNEAKY LOAN

Your bank won’t allow you a mortgage if you’re borrowing the money for your deposit — so getting a sneaky loan out to cover your deposit won’t work. The Central Credit Register (CCR), which went live earlier this year, keeps a record of all credit cards, mortgages, overdrafts and personal loans — including those issued by credit unions, local authorities, licensed moneylenders and banks. Before giving you a mortgage, your lender will check the CCR for details of any loans you have. Previously, lenders checked the Irish Credit Bureau (ICB) for these details. As around 95pc of credit unions are on the ICB, a small number are not.

 “If a credit union was not on the ICB in the past, then a loan might not have appeared when an ICB credit check was run,” said Paul Bailey, head of communications with the Irish League of Credit Unions. “However the CCR is now in place and all credit checks must now be done using the CCR. All credit unions are now currently live on the new CCR and all credit union loans will appear on any credit checks through the CCR — unless the loan is for less than €500.”

 Either way, your credit union is unlikely to lend you, or your parents, money for a deposit. “Credit unions do not currently offer specific loans for deposits for mortgages,” said Bailey.

DON’T TEAM UP WITH A FRIEND

Although it can be easier for singletons to come up with the deposit for a home by teaming up with a friend or sibling to buy a home, this can be a big mistake. Many of those who took out joint mortgages with friends or siblings during the boom ran into enormous financial difficulties afterwards. The emigration or unemployment of a friend often left one of those who took out the joint mortgage lumbered with the responsibility for the loan. Friends and siblings also typically go their separate ways after time — but if a property bought jointly cannot be sold, the mortgage still needs to be repaid and the property still needs to be maintained. Even if you have no reservations about buying with a friend or sibling, you could struggle to get a mortgage.

  “In most cases, borrowing with a friend or sibling is not entertained by lenders today,” said Trevor Grant of the AEMA. “Lenders are concerned that down the line one friend or sibling may marry — or one may want to sell the property while the other won’t want to sell.”

DON’T ASK PARENTS TO TAKE OUT LOAN

Don’t put your parents under pressure to take out a loan to help with your deposit. Most banks will offer either a personal loan or top-up mortgage to parents seeking to raise money for a child’s deposit.

For example, with Bank of Ireland, parents could take an equity release loan out on their own home to gift to a child toward the purchase of their home. With AIB, it may be possible for parents to borrow the money for a child’s deposit by taking out either a personal loan or by topping up an existing mortgage on the family home. Ulster Bank offers personal loans of up to €40,000 on a case-by-case basis. KBC doesn’t offer loans to parents seeking to raise money for the deposit on a child’s home. Should your parents take out a loan in their fifties or sixties, that loan could very easily follow them into their retirement years — and as their income will usually be lower then, they could struggle to repay the loan and end up in financial difficulty.

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