We are first-time buyers currently applying for a mortgage. Over the years I have received gifts from my parents within the rules of the small gift exemption. I would like to put those that I received last year towards a deposit.
We were 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 perceived as “sudden payments” by the bank(s). We have a strong household income and a good independent savings record.
I am aware the banks have tightened their lending rules, but is it necessary for my parents to sign this letter considering these are gifts which I can choose to spend or save as I please? They are not a loan and are tax compliant.
Mr P.W.
I have to say this is a new one for me. However, looking at the mortgage terms and conditions of several lenders, I see it has become yet another standard piece of paperwork required.
The capacity of banks (whose recent history shows their singular failure to abide by any risk policy) to devise further box-ticking exercises in an effort to protect themselves is quite ingenious. If only they engaged in a proper assessment of individual circumstances rather than letting clunky computer programmes do the bulk of their work for them, it might be time better invested.
Still, that being said, it does make sense that a bank assessing a mortgage application would want to be certain that there are no unknown future liabilities.
That’s why, for instance, they always want details of any existing loans even with other institutions when you apply for a mortgage. They need to be aware not just of your income but your capacity to pay – and to ensure it is not impaired by other financial commitments.
It’s not that the banks want to force you to use this money for the deposit – or bar you from doing so. That’s entirely at your discretion, with no obligation on how you would use any potential future gifts either. Your parents are simply signing to confirm it is a gift and not a loan.
My initial fear that the letter would commit your parents to future gifts as some sort of guarantors as the bank assessed your ability to meet mortgage payments is unfounded. All it does do is confirm that the money given to you is indeed a gift and involves no repayment, either now or in the future.
I can only assume the requirement was brought in because of the growing tendency of first-time buyers to rely on the Bank of Mom and Dad to get on the housing ladder by boosting deposit funding. It certainly wasn’t in place the last time I sought a mortgage.
In your case, as with an increasing number of families, availing of the small gift exemption has simply become a sensible part of your family’s tax planning arrangements. Where financial circumstances permit, it makes perfect sense for more financially secure parents to avail of the exemption to help their children.
The money often helps defray the cost of childcare or funds a holiday for generally more cash-strapped younger families. Or, as in this case, it can go towards building the 10 per cent 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 property prices.
As I’ve mentioned before, each parent can give up to €3,000 to a person in a given tax year. That means your two parents can legitimately gift you up to €6,000 between them with no tax liability, either for you or your parents. In fact, they could also gift up to a further €6,000 to your partner on the same basis.
Of course, it could be that the bank looks at your application – and accompanying bank statements – and makes the common-sense judgment that this is simply parents availing of the small gift exemption, not requiring any “gift letter” form-filling. But I wouldn’t ’t bet on it.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.
