With the skyrocketing price of property in capital cities, many aspiring homebuyers are having a hard time saving a deposit of 20% of a home's purchase price.
One solution to this problem is to ask for financial support from their parents, otherwise known as the "Bank of Mum and Dad". According to Digital Finance Analyst (DFA), more than 55% of first home buyers get financial assistance from the Bank of Mum and Dad in order to purchase their first home.
Should you get a home loan from the Bank of Mum and Dad? The answer will generally depend on your family’s financial situation. Here are some ways that parents can help their adult children to get a home loan:
Gifting the deposit
The most common and straightforward option to help your children buy their first home is to give them the deposit money as a gift.
In the current mortgage market, this will likely be 10 to 20 per cent of the value of the property. If you can afford the entire deposit that can be a good start.
Financial institutions will require borrowers to present evidence such as a letter indicating that the deposit is a gift and not a loan to be repaid. Some lenders will also require the gift to be deposited in an account before applying for a mortgage.
It is possible to secure a house deposit with 10% of the purchase price, but being able to put more down 20% will let homebuyers avoid paying for Lender’s Mortgage Insurance, reduce their interest payable, and secure a better home loan interest rate.
However, if financially contributing to the 20% deposit is difficult for parents, another way the Bank of Mum and Dad can help is to let their adult child live at the family home rent-free. This can enable them to save for a home loan deposit faster.
It’s very difficult to save up for the deposit, especially when you’re still renting. Letting your child live with you at home is a simple way to help them save up. Even if you ask them to contribute financially while their under your roof, this could still benefit them in saving for the deposit money.
The Bank of Mum and Dad buy the property
Parents can buy the property for the purpose of renting it out by their children. The rental income can be used to pay part of the monthly mortgage.
The negative part of this is that the child still doesn’t own the property. But negotiating for a cheaper rent with the parents can pave the way to save for a deposit sooner.
Buying the property jointly
Parents and children can take out a joint mortgage on a property. This means that both parties are responsible for paying the mortgage. Co-buying with parents can help children get onto the property ladder sooner.
There are two ways you can buy the property together.
- Joint tenancy. This means each one of you owns the property equally, and if one joint tenant dies, the surviving one automatically gets the share.
- Tenants in common. This means both of you own a share/portion of the property, and if one dies the share is passed on according to the chosen beneficiary.
For example, tenants-in-common means property ownership can be divided in whatever ratio you want, such as 70/30 or 60/40. Joint-tenancy means the property is owned equally by both tenants.
Asking for financial assistance from the Bank of Mum and Dad is an increasingly common way to speed up saving for a house deposit and buy a property but parents need to be aware of the risks that come with some strategies.