In today’s economy it is difficult for first time buyers to save a deposit for their first home. With the rising cost of rent and DIRT at its highest rate in Irish history, the challenge in escaping the “rent trap” is a large one. The events of the past have led to more stringent requirements when applying for a mortgage. The first time buyer requirement to have 10% of the loan to value, acts as a hedge against negative equity for home owners. This requirement however has led to a catch twenty-two situation for the squeezed middle who work to pay Rent and save for a mortgage. There are however two items which should be considered if you are saving for your first home. The first is the tax free gift exemption of €3,000 per person and the second is DIRT relief on first time buyer savings used to purchase a property.
The period where individuals pay rent and saving for a mortgage will account for a large portion of their take home pay. After the deposit is saved and mortgage drawn down, the allocation of income to your mortgage will not be more than 40% of your take home pay. First time buyers should be aware of the €3,000 as a tax free gift exemption from one disposer in any calendar year. This means that parents can gift €3,000 each to a child to help towards their mortgage without being subject to Capital Acquisition Tax (CAT).
Assuming a property price of €150,000, €15,000 as a deposit is required before mortgage approval can be sought. Let assume parents gift €3,000 each to their child towards the deposit. The required €9,000 must be saved before mortgage approval can be granted. When we look at savings options on the market today first time buyers usually hope to save their deposit in a period less than 5 years. With this term in mind most investors do not want to take much risk with their savings as they have a clear goal and the loss of capital is not acceptable for some individuals in this situation. A deposit account or secured savings account are suitable structures for first time buyers. Both structures provide capital security to the saver. The return on secured savings or deposits are very low at the moment due to the European Central Banks (ECB) negative interest rate strategy. The ECB are attempting to stimulate growth and increase inflation using negative interest rates. The knock on effect of low cost of capital results in banks not requiring the level of funds from savers than they did in the past. KBC currently offer a Variable rate Regular Saver Account at 2.00% AER for savings between €100 – €1,000 per month. Deposit Interest Retention Tax(DIRT) is applied to the gain on any savings or investment product at rate of 41% held in financial institutions such as Banks, Building Societies or Credit Union accounts.
When saving for a first property it is important to note that Revenue offer First Time Buyer DIRT Relief to first-time buyers of a house or apartment who purchases or self-builds a property between 14 October 2014 and 31 December 2017. The property must have been purchased or built as the first-time buyer’s home. First time buyers are entitled to claim a refund of any DIRT deducted from interest earned on savings used for the purchase of a property or a self-build in the 48 months prior to the purchase date. The relief is confined to DIRT paid on savings up to a maximum of 20% of the purchase price or in the case of self-builds 20% of the completion value of the property.
Taking the €9,000 required above, let’s assume the investor puts away €8,200 through a savings or investment product suited to their risk preference. Assuming interest of €800 on the sum invested, DIRT will be applied at 41%. The sum of €328 is paid in tax to the Revenue. Resulting in an overall return of €8,672 to the investor. The investor can claim back DIRT up to 20% of the purchase price of the property. 20% of the property used above of €150,000 would be €30,000. The first time buyer can claim up to €30,000. The DIRT paid on the savings for the property was €328. Therefore, the maximum DIRT refund for this example is €328.
To make a claim the property must be registered for Local Property Tax (LPT). Once registered, you log in to the LPN system and enter your details. The system will display a claim form and you enter the required information and submit your claim.
Metis Ireland Ltd are Financial Advisors and we will work in conjunction with your Tax Advisor to implement a Financial Plan specific to your needs. If you would like to discuss the content of this blog in more detail, please do not hesitate to contact us on 061-518365.
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