The Bank of Mum and Dad

The phenomenon of the ‘Bank of Mum and Dad’ has become an integral part of the property landscape in Ireland, reflecting both the challenges faced by first-time buyers in securing adequate financing and the willingness of parents to assist their offspring in making that crucial step onto the property ladder.
This familial financial support can take various forms, from gifting funds to acting as loan guarantors, and while it often proves to be a lifeline for many, it also carries with it a set of implications that both parties must carefully consider.
For many young Irish adults, the dream of owning a home seems increasingly out of reach due to high deposit requirements and strict mortgage lending rules.
In this context, the ‘Bank of Mum and Dad’ serves as a crucial lifeline, providing the necessary boost to bridge the gap between savings and the price of a desired property. It’s estimated that a significant portion of first-time buyers now rely on financial help from their parents.
For parents, the decision to financially aid their children in purchasing a property is one that should not be taken lightly.
It requires a thorough assessment of their own long-term financial security, as well as an understanding of the potential tax implications that such a gift may entail.
In Ireland, the Capital Acquisitions Tax (CAT) governs the taxation of gifts and inheritances, and parents must navigate these rules to avoid unexpected liabilities. It’s crucial for parents to plan their finances meticulously, ensuring they have sufficient reserves after aiding their children, and to be aware of the thresholds and exemptions under CAT to mitigate any tax burden.
On the other hand, children receiving financial help must be transparent with their solicitors and mortgage brokers about the origins of their funds, as anti-money laundering regulations necessitate a clear trail of the money’s source.
Moreover, if the funds are a loan rather than a gift, this could impact the mortgage affordability calculations by lenders, as they would factor in the loan repayments when assessing the borrower’s financial stability.
The role of the ‘Bank of Mum and Dad’ also extends to acting as guarantors for mortgages, which can be a risky proposition. Parents must understand that they are putting their own financial wellbeing on the line, as they could be liable for mortgage repayments should their child encounter financial difficulties. This could even lead to the parents risking their own home if they use it as security.
The dynamics of the ‘Bank of Mum and Dad’ also have broader economic implications. By enabling certain buyers to enter the market, it can inadvertently contribute to the inflation of property prices, further exacerbating affordability issues for those without such familial support. This raises concerns about the equity and sustainability of the housing market, and whether reliance on parental assistance is a symptom of deeper systemic issues that need to be addressed.
The recent spotlight on the ‘Bank of Mum and Dad’ by the Irish government, particularly concerning the tax treatment of family loans, indicates a growing recognition of its significance in the property market. While proposed changes to the tax treatment of such loans were retracted, it underscores the need for both parents and children to stay informed about potential legislative shifts that could affect their arrangements.
In conclusion, while the ‘Bank of Mum and Dad’ plays a pivotal role in helping many Irish families achieve homeownership, it is a complex arrangement that requires careful consideration of personal finances, tax implications, and broader economic effects. As the property market continues to evolve, it will be interesting to observe how this informal financial institution adapts and what measures might be introduced to ensure a more equitable path to property ownership for all.
It is important that parents understand the different tax and legal implications depending on how their contribution is structured and documented so that they can make informed choices. The key message to take away is that parents having the benefit of specialist advice is key to them being able to understand the various options and implications, so that they can make an informed choice about what is right for them and ensure the relevant paperwork is in good order.

Tommy Corbett and Donal Carey of Carey Corbett Financial Solutions, Ennis, are Financial Brokers who give impartial advice on pensions, retirement planning, investments, mortgages and more. Call for an appointment
065 6893540.