The Bank of Mum and Dad
The Great Australian Dream - owning your own home!
Despite changing times, this is one dream that endures and has carried over into each generation. However, for many young Australians, namely Millennials and Gen Y, this is a distant, if not impossible dream. Not because they don’t want to buy property, but more because they believe entering the property market is out of reach. There’s no doubt escalated property prices across capital cities has contributed to this mindset, as has the increasing cost of living and its impact on the ability to raise a decent deposit. Even those diligent enough to save regularly have had time working against them, with property market values increasing faster than their savings! On the other hand, historically low interest rates are making the prospect of buying property all the more appealing, so you can understand the frustration of many young Australians. Yet owning property can still be possible for them through ‘The Bank of Mum and Dad’!
This ‘concept’ is increasingly being spoken about at family dinner tables as more and more parents seek ways to support their children’s property dream of buying their first home. Let’s look at a few viable options using ‘The Bank of Mum and Dad’ that can be relatively low risk:
Parents can help their children break into the market by offering a discretionary amount as a gift e.g. contribute to a deposit or gift enough to cover the full deposit and associated costs of buying. This may help the borrower avoid thousands of dollars in lender mortgage insurance (LMI) applicable if a borrower has less than 20 % deposit for a property purchase. A gift is a straightforward and very effective way of helping out. The key thing to remember with financial gifts is that some lenders may also request verification of the source of funds the parents have donated.
Family Provide Additional Security
This is where parents offer their children assistance providing their own home or investment property as additional security to mitigate the lenders risk with additional security to cover the proposed facility. This is one of the most popular options as the loans are entirely the responsibility of the borrowers as the parents are providing security guarantee only and not financial guarantee.
Family Financial Agreement
This is where parents give their children a loan under a family financial agreement. Parents may agree to contribute a nominated amount as a no-interest or monthly repayment loan to the borrower with specific conditions in respect to repayment e.g. repayable only in the event the property is sold or repaid within a certain timeline. As per any financial arrangement, legal advice should be taken into account and the agreement should always be formalised
Parents may consider buying as joint borrowers and buying a property with their children.
Ownership and loan repayments are shared, as are any profits if the property is sold in the future. However, as with any joint venture, the cost-benefit analysis, risks and future financial direction of all parties should be weighed up. It is also critical that everyone involved is in agreement with respect to each party's obligations, the use of the property and future ownership plans for the asset.
There are a number of options available to first home buyers, naturally getting your mortgage broker involved early in the process to help explain the process to all parties is important as they generally know the individual nuances the various lenders have when it comes to setting up this type of borrowing.
Give me a call on 0438 041 111 to help you started, you may end up getting into your
first home sooner than you think!
As always, enjoy life, work hard, play safe and remember that we are always here to help you
‘Take the Confusion Out of Lending’
Peter Vinci - 0438 041 111