Targeted gifting to reduce the mortgage burden for adult children
When planning for the future, we not only focus on securing our financial well-being but also contemplate the legacy we leave behind for our loved ones. Many parents enjoy the fulfilment from gifting money to their adult children while still alive, with a specific emphasis on alleviating the burden of mortgages. This act of giving with a warm hand rather than a cold one, not only brings about financial advantages but also resonates emotionally through generations.
Reducing the Mortgage: A Practical and Emotional Investment
Financial Freedom:
- One of the primary benefits of gifting money for mortgage reduction is the immediate financial relief it provides. By reducing or redeeming a mortgage, parents empower their children to enjoy increased financial freedom, allowing for more disposable income that can be used for other essential needs, investments, or leisure activities.
Interest Savings:
- Gifting a lump sum to pay down a mortgage can significantly reduce the interest burden over the life of the loan. This can translate to substantial savings, enabling loved ones to allocate funds towards other important life goals such as education, more family leisure time, or retirement planning.
Homeownership Acceleration:
- Parents who contribute to mortgage reduction accelerate their children's journey towards complete homeownership. Owning a home outright or with minimal debt can provide a sense of stability and security, creating an environment that nurtures personal and family development.
The Joy of Giving:
- Contributing to the financial well-being of children while alive allows parents to witness and partake in their success and happiness. The joy of giving with a warm hand, rather than leaving an inheritance as a distant gesture, creates a deep sense of contentment.
Shared Achievements:
- By helping children achieve significant financial milestones, parents become active participants in their children’s life journey. Shared achievements create lasting memories and strengthen family bonds, helping to grow a sense of togetherness beyond monetary transactions.
Peace of Mind:
- Knowing that you've positively impacted your children's lives during your lifetime can bring tranquillity. This emotional assurance extends beyond financial matters, contributing to a sense of emotional well-being for both parents and children.
Family Values and Legacy:
- Actively engaging in financial conversations and helping with mortgage payments instils valuable lessons in financial responsibility and family values. Parents can shape their legacy positively, ensuring that their wealth serves as a tool for family unity and prosperity.
Gifting money to your children before passing away, especially for mortgage reduction, is a powerful and meaningful way to shape their financial future. Beyond the immediate financial advantages, the emotional benefits for parents are immeasurable. The act of giving with a warm hand creates a legacy of love, support, and shared achievements. In the end, the true value lies not just in the amount given but in the lasting impact on family relationships and the fulfilment that comes from making a positive difference in the lives of those you care about most.
Example:
Consider John and Mary, who purchased a house in 2019 for €600,000, borrowing €500,000 over 35 years at a fixed interest rate of 3.0%. Their monthly repayments are €1924.
In 2024, their rate is expiring, and their mortgage balance is now €456,000. As they are rolling on to a new fixed rate of 4.25% (fixed for 3 or 5 years) their repayments will increase by €321 monthly to €2,245. The cost of credit for the next 30 years will be €352,000.
If John & Mary were gifted €200,000 from their parents and did a partial redemption against their mortgage on the capital balance keeping their repayments in line with what they are used to paying €1,924, they could reduce their mortgage term in half from 30 years to 15 years and save €261,000 in interest.
Alternatively, if they decided to keep the term the same but reduce their monthly commitment, their repayment would reduce from €2,234 to €1,261 savings them €983 monthly.
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