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Will banks entertain a mortgage to our son on top of a big family loan?

Q&A: If priority is to facilitate son’s ability to buy a home, structure of family financing might need a second look

Rising house prices mean people are getting more creative in their financing but affordability remains the bottom line. Photograph: iStock

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Dominic Coyle
Tue Feb 6 2024 - 06:00

We’ve been exploring the option of lending our adult son money to help him buy a home.

A broker advised him that banks will not accept a deposit in part form of a loan. I approached two banks myself to clarify this.

A loan officer at Bank of Ireland told me it would not be a problem but that we would have to detail and provide documentation in this regard.

AIB provided a very strong and clear answer in writing: “The balance of funds must not be funded by borrowings of any kind.”

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The response from AIB made me a bit insecure about the response from Bank of Ireland. The timelines for this are probably for my son to look to buy in about 18 months’ time so we are in the research/admin phase of the process.

The support we are looking to give him is substantial – a six-figure sum – and I wonder if that is relevant too? If the repayment agreement we have with him is interest-only in the short term, the repayments would be doable one way or the other, but again it depends on whether the lender would accept that repayment schedule.

A financial adviser suggested to us that a loan approach for these funds was also a safety net mechanism for parents, as lenders, to ringfence the loan/capital in the event of a subsequent marriage followed by divorce. Not a nice prospect for anyone to contemplate for the future, but probably sensible advice. Any thoughts on that, I wonder – not that marriage is a short-term prospect in this case anyway?

Ms G.M.

You’ve clearly put quite a bit of thought into this already but I think the first thing is to pare it back to your key priorities. As I understand it, the purpose behind all this is to put your son in a financial position where purchasing a home is a realistic option. I am assuming he does not currently have the funds to bring to the table as a deposit – or he does but property prices for the sort of home he is considering and its location mean he will not be able to bridge the gap between the price of any property he would be interested in and what the banks would be prepared to lend on his earnings on top of his deposit and any incentive scheme that might provide additional help, such as Help to Buy.

The first thing to consider in those circumstances is whether him buying a home in the near future is practical at all. While rising prices are increasing pressure on all younger people to get on the housing ladder now if they can, for most people that requires two incomes – and that’s not just a recent thing. Buying a home together is among the big commitments a couple makes together.

And while it might be nice, from your view as parents, to see him settled in terms of a home, will he feel the same if, as seems likely, he is going to be living in more or less permanent financial stress.

Assuming you decide to proceed, the first thing to settle appears to be the attitude of the banks to the sort of financing you are considering.

Mortgage lending

At first sight, the two banks you consulted would appear to be poles apart in their view of the arrangement but I suspect that is not the case.

AIB says it will require assurance that the aspiring mortgage holder’s loan exposure is limited to it. It will not entertain an application where your son also needs to borrow elsewhere – from you – to make the figures stack up.

If Bank of Ireland said it is “not a problem”, I am going to have to assume they mean that such a loan would not preclude a mortgage application. It is notable, and understandable, in this regard that it has told you that it would need details on any such loan and related documentation.

Mortgage lending is all about risk assessment and, following the torching they got over the reckless lending they engaged in during the Celtic Tiger years which required taxpayer-funded State bailouts, Irish lenders remain remarkably risk averse.

Either bank – or any other lender – will want to be sure that your son is able to pay back his loan to them. Any commitments he has in relation to other loans, credit card debt, overdrafts or any other debt such as hire purchase agreements, car purchase plans or buy now, pay later arrangements will all be taken into account, effectively reducing what they would be prepared to lend.

By your own admission, your son will not be able to repay any capital on this loan, at least in its early years, so he will only be paying you back the interest arising. This in itself shows clearly how stretched he is likely to be financially if he is trying to keep all these balls in the air.

Lenders are also bound by Central Bank rules which say that the maximum they can lend is four times a first-time buyer’s earnings or no more than 90 per cent of the value of the property, whichever is the lower. These rules are in place to ensure that borrowers are not over-extended, and the regulator expects banks to consider the limits in that context.

Yes, the Central Bank does allow lenders certain flexibility – 15 per cent of first-time-buyer lending can take place above the limits – but those exceptions tend not to be extended to people who would already be seen as straining the bounds of affordability.

What I am saying in essence is that I think AIB have probably been more honest with you. I am not saying that Bank of Ireland would refuse a mortgage application for your son on the back of what you concede would be a substantial family loan, but I would be surprised if they would, in the end, approve the mortgage he seeks on the back of those circumstances.

Gift or loan

So why lend your son the money rather than simply give it to him?

Obviously there are several reasons. You might have this money available now but expect that you may need it yourselves later in life when your own earning capacity is diminished. Or you might have other children and are keen that one is not unfairly supported over others. Or, perhaps, you simply want to plan in a tax-efficient way to ensure that your son retains the maximum scope to inherit from you free of tax at some later point.

And then there is the issue raised by the personal finance adviser you spoke to: a family loan properly documented means the money will not form part of his assets in the event of a subsequent marriage break-up.

The adviser is correct and the other reasons are all valid but I suspect you are going to have to bite the bullet here.

The good news is that this young man is not yet married; indeed, that prospect is not even on the horizon, never mind the unpalatable prospect of considering the break-up of such a relationship even before it has been formed.

You can give your son up to €335,000 as parents without him having to deal with the prospect of paying tax on that money. He does not even have to inform Revenue that he has received money from you until the amount involved exceeds €268,000 – 80 per cent of the tax-free threshold. As long as the sum you are discussing, substantial though it is, is below that €268,000, you have options, although some certainly require a strong level of trust between the family members.

As far as the banks are concerned, this is a gift and not a loan so it would not raise the sort of red flags that might undermine his ability to raise the mortgage he needs under the scenario you are considering.

If you have the financial wherewithal to afford such a move and were intending to leave your son this sum or more in any eventual will, it makes sense to organise the funding at the time it is required rather than leaving him unable to afford a home until you die. You would, of course, most likely need to amend your will to take account of this approach, especially if the estate was to be shared across more beneficiaries than just him – but that’s clearly doable.

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And while the banks, and presumably Revenue, would prefer not to countenance it, I’m not sure I see anything to stop you deciding between yourselves that some or all of this money that has been transferred in a family arrangement will be recategorised from being a gift to being a loan informally, or formally down the line.

Certainly the banks cannot preclude him borrowing elsewhere after he has drawn down his mortgage. And although any formal lender would be wary given the mortgage commitment, you could decide you are happy to assume the risk – given that the bank will certainly have prior claim in the event he cannot meet his formal loan commitments.

The absence of formal documentation would leave you exposed if he gets into trouble with repayments and it is also true that the lack of that paperwork might see the sum at risk in any family law proceedings down the line; those are risks you would have to decide you were happy with before you proceed.

The bottom line, as I see it, is that any bank will limit what they are prepared to lend in a mortgage to someone with a six-figure outstanding liability on which they are currently paying only the interest – if they are prepared to countenance a mortgage loan at all.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice

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