Asking for help from the bank of mum and dad is a common way for most borrowers to buy property if they can’t get over the deposit hurdle.
There are four common ways your parents can help you buy a home:
Being A Guarantor
Your parents can be a guarantor on your home loan. This means they use their property as a security for the loan you get to purchase your home. This helps you buy a home with little to no deposit without paying Lenders Mortgage Insurance (LMI).
This is a great way for parents to help you buy your first home. Once the value of your property increases enough, you can refinance and release your parents from the guarantee.
As a guarantor, your parents are not required to make regular repayments. However, if you default on the loan, your parents might be required to pay.
Buying Together
You can also buy a home with your parents. This strengthens your application, and you also share the burden of deposit, stamp duty and repayments. You and your parents share any capital gains if the value of the property increases.
Not all applications for such an arrangement will be straightforward. If there is a parental borrower on the loan, the lenders will take into account their retirement age and other factors to determine their ability to repay the loan.
You also have to agree on the best arrangement regarding ownership structure. It can be tenants-in-common or joint tenancy, and there are pros and cons to each, depending on your circumstances.
As a parent, if you’re buying a home with your child, it will affect your borrowing power. The lender will assess you based on your liability for the whole loan, regardless of the size of your share.
Gifted Deposit
This is the simplest option, as your parents will gift you the deposit with no obligation that you repay it.
Make sure your parents seek professional advice so they know the implications of gifting you the money.
We have gift and loan letter templates on our website that you can use.
Tip: In the gift letter template, make sure it’s worded in a way that expresses the gift is for the child only and not the couple. A good mortgage broker can help with this.
Unlike with a loan, if parents gift their married child money for a deposit, the child’s partner can claim part of the gift in the event of a divorce. A good mortgage broker should speak to the parents to make sure they are comfortable with agreeing to provide a gift, and to give them a chance to express any concerns they may have.
Loan From Parents For The Deposit
This is similar to getting a gift, except that you need to repay the funds you borrowed from your parents.
You and your parents will need to establish the terms and conditions, to make sure it’s considered a loan and not a gift:
- Agreements for loans from parents to the child must be in writing and signed
- It should be clearly stated that the money has to be repaid
- Specify how much the interest will be
- Specify the loan term
With a loan, if you have a relationship breakdown, your partner cannot claim they have a right to it. Make sure the written agreement states that the loan is for the child of the parents, not the child and the child’s partner.
Gift Vs Loan: Which Is Better?
There are lenders who accept either a gifted deposit or a loan from your parents to buy a house. Let’s look at the difference between the two options and see which one would work best for you and your parents.
| Point of difference | Gift | Loan |
|---|---|---|
| What are the tax implications? | There are no tax implications for the giver or receiver. | There might be implications for the giver (your parents) as they get interest on the loan, which might be included in their taxable income. |
| Is it refundable? | No. It has to be stated in the gift letter that the gifted amount is unconditional, non-repayable and non-refundable. | Yes. It has to be stated in the letter that the loan amount has to be repaid. |
| What happens in a divorce or relationship breakdown? | The gifted amount cannot be recuperated by your parents and will be divided with your partner. | A loan is not considered a part of divisible assets during a divorce, so your partner has no claim on it. |
| Is it a factor in assessing your serviceability (ability to pay the loan)? | No | Yes; however, if it’s stated the loan is payable on demand and has no interest and repayments, it can be excluded from servicing. |
If you are considering getting a gifted deposit or a loan from your parents for a deposit, get legal and financial advice before you take that step.
If I’m borrowing from my parents, what should I do?
- Assess your borrowing capacity before you take help from your parents
- Expect the lender to ask you more questions, as they do not always take a favourable view of gifted deposits
- You and your parents should be clear on whether the funds provided are a gift or loan
- Do not rely on lenders to tell you how much you can borrow. Factor in any changes like a job change, a new baby, etc, to have a good idea ahead of time of how much you may be able to borrow.
If I’m lending to my child, what should I do?
- Consider your financial goals and needs first.
- Seek financial and legal help to determine how much you can allocate and whether a loan or gift is the better option
- Before signing the paperwork, think about what will happen if your child cannot pay off their loan.
- Get everything in writing to eliminate misunderstandings about repayment obligations.
Getting help from your parents to take out a home loan has advantages:
- You enter the property market sooner
- You don’t have to wait to save a larger deposit
- You might be able to reduce the LMI paid or avoid paying any at all.
Make sure you and your parents seek legal and financial advice before choosing an option, as risks are involved in all of them.
At Home Loan Experts, our mortgage brokers are experienced in helping borrowers who sought help from their parents to get approved. Call us on 1300 889 743 or enquire online.