For many homebuyers, saving the deposit required to enter the property market is a hurdle that’s not easily overcome.
Those looking to buy now, on average, will be spending their annual income many times over just to secure a home.
This number has risen dramatically in the past few generations for a number of reasons.
Getting into a home for the first time can be easier with help from mum and dad. But should you take it? Picture: Getty
What is the bank of mum and dad?
The bank of mum and dad is a phrase used to describe borrowing money from someone who either has accessible equity in their home, or can lend money as a cash gift.
Many in the older generation hope to help their offspring by giving them a leg up in a market where, for many younger potential first-home buyers, the odds aren’t stacked in their favour due to historic price rises.
According to Australian Unity, around 30% of first-home buyers receive money from their parents to help them buy a home.
According to Mortgage Choice broker James Algar – who is based in Australia’s most expensive city, Sydney – around 70% of his current clients who are buying their first home receive help either in the form of a cash gift or by having their parents agree to guarantee part of their deposit.
Advantages and disadvantages for buyers
While it might sound like a no-brainer for enthusiastic first-home buyers, there are a few things to be aware of before you shake hands on anything with your folks.
| Pro | Con |
| Enter the market sooner | Could make setting up a loan more complicated with a lender with more forms to fill out and paperwork to provide. |
| Have more purchasing power with the bank with a higher LVR | Final loan approval will take longer as the lender has to understand a more complex arrangement |
| Pay lower fees for the life of the loan | May strain relationships if an agreement isn’t reached from the onset |
| Be more flexible with the repayments compared with dealing with a bank | Could become complicated if either party’s circumstances change |
Advantages and disadvantages for lenders
While it’s an incredible gift to be able to give to the people you love most in the world, there are things to consider before handing out large sums of cash to your offspring.
| Pro | Con |
| You can see the effect of your gift in real time | Your financial position may become risky if you lend more than you can afford |
| In the case of the money being an early inheritance, you can be sure it’s divided fairly | You wont’ have access to the funds if an emergency arises before it’s repaid |
| You may benefit when it comes to the pension asset test, if applicable | May cause disagreements if there are more family members in need of a loan in the future |
| May strain relationships if an agreement isn’t reached from the onset |
Tax implications for parents
If you’re giving or loaning money to your offspring it’s best to get independent legal and financial advice.
Gifts need to be declared to the ATO and Centrelink benefits may be affected so it’s important to know how you might be affected before you agree to anything.
While it might feel like the right thing to do, gifting or loaning cash needs to be clearly understood by both parties. Picture: Getty
How much do parents loan their children for a house deposit?
According to Mr Algar the most common figure for a younger buyer to be gifted from their parents is between $10,000-$50,000.
He said this can be in the form of a gift, an early inheritance, a private loan or a guarantor loan.
“Mum and dad lenders are funding this through either taking out a second mortgage, taking out their own loan or releasing equity from a property they own.”
Mr Algar explained that while sometimes it’s a gift, often the funds are arranged to be paid back in a private arrangement either over time or when the property is sold.
However, a bank will require a statutory declaration stating that the amount given is a gift and doesn’t require the lender to pay it back.
If the bank finds that the money is a debt then this will complicate a lending application and delay approval, so it’s best to get advice from a mortgage broker if you’re in this situation.
Alternatives to borrowing money from parents to help buy a house
While a gift in the form of cash to put towards a home sounds like a good idea, it can put relationships at risk and have far-reaching financial consequences if not fully thought-through.
Especially as people edge closer to retirement it’s important that they don’t put their superannuation at risk, explained Mr Algar.
Getting into the housing market is harder for borrowers than ever before. Picture: realestate.com.au
There are a number of other options for homebuyers to consider before taking money from their parents:
1. Guarantor loans
A guarantor loan is different to using the bank of mum and dad because no actual money actually changes hands, leaving superannuation funds (and often relationships) intact.
Having someone act as guarantor is Mr Algar’s preferred situation as he sees it as the most financially responsible and lowest risk for both parties.
In normal market conditions and as property prices rise the guarantor is usually released within 18 – 24 months as the borrower’s loan to value ratio (LVR) reaches 20%, explained Mr Algar.
As the 20% threshold is reached the borrower can have the property re-valued and subsequently refinance with the same lender or a different one.
A guarantor loan means the borrower avoids lenders mortgage insurance and generally pays lower fees over the life of the loan.
2. Low deposit government secured loans
The government also lets borrowers access a government guarantee if they have saved as little as 2% of the purchase price with a scheme called Help To Buy.
State governments also offer schemes to help would-be buyers and those in regional Australia can also get additional help with the Regional First-Home Buyer Support Scheme.
3. Consider paying LMI
If you’ve exhausted all your options when it comes to getting your deposit as high as possible but it’s still not at 20%, don’t worry too much.
Paying LMI could still be more cost-effective than waiting until you save the additional funds due to the rate at which the market rises, especially in some areas.
If you’re not sure then it’s best to speak to a broker or use our handy calculators to determine whether you’re better off saving more or entering the market sooner.
Top tips for the bank of mum and dad
- Don’t lend more than you can comfortably afford
- Avoid accessing your superannuation
- Consider what will happen if you’re asked by another family member for a similar loan.
- Always set out the terms in writing to avoid confusion
- Get independent legal and financial advice before agreeing
This article was originally published on
3 Jun 2023 at 9:21am
but has been regularly updated to keep the information current.