How to finance your child's dowry?

The share of young people up to 25 years old among homebuyers has significantly increased over the past year. One of the reasons for this is that these young people are more often receiving financial support from their parents. How exactly does that work?

As parents, from the time your children are teenagers, you look forward to the moment they leave home and start living on their own. This moment can happen quickly, for example, after high school, or a few years later after obtaining a degree from further education. As parents, you can choose to contribute to your child's tuition costs or even pay for their room in student housing. Other parents choose to help pay off student loan debt later when they can't spare the money now. But what if you want to (co-)finance your children's first home? What are the possibilities?

Giving money to children

By partially covering the purchase price donate a child needs to borrow less money from a bank. This also makes it possible, for example, to buy a more expensive house or requires a smaller loan from the bank.

When making a gift, you must take gift tax into account. Is the child between 18 and 40 years old? Then, provided the money is used for “buying a house,” you can gift €100,000 (one hundred thousand euros) tax-free. However, there are several conditions attached to this. The gifted amount must be used for the purchase of a house or an improvement/renovation of a house, repayment of a home loan, or the redemption of leasehold (a vacation home does not qualify for the gift tax exemption). The gift may also be used to repay the remaining debt of a mortgage loan, including remaining debts from before October 29, 2012 (where interest is not tax-deductible). Have you made a gift to your child(ren) before? Then the tax exemption is not one hundred thousand euros, but lower, or there is no exemption at all.

You can also choose to:

• The donation of one hundred thousand to be spread over 3 consecutive years;
• Shortly before your death, gifting money for a home also means that in most cases, no gift or inheritance tax will need to be paid.;
• To provide a family loan.

A family loan

Financially, it can be more attractive to provide a loan to your child(ren). When the loan is structured smartly and can be combined with a gift, this can be financially more advantageous for both parents and child. This is also referred to as a ‘family bank'. The interest on a family bank loan is tax-deductible for the child. Also, given the current state of savings interest rates, it is relatively safer to invest savings in your child's home than to leave it in the bank.

Are there no disadvantages to a family loan?

Yes, there are. With a (partial) loan, it is not possible to buy a more expensive house. This is possible when money is gifted.

A family loan can be done with a notarial deed, but it is not mandatory (as long as the parents do not want a mortgage). However, you must ensure that everything is properly arranged. For example, consider a high or low interest rate, the method of repayment, and the loan term. Marks Wachters notaries can advise you on this.