Buying property with help from the bank of mum and dad.
With property prices at an all-time high, more and more first-time homebuyers are turning to their parents to help them get their foot on the property ladder.
According to Digital Finance Analytics (DFA), the bank of mum and dad was one of Australia’s top 10 mortgage lenders in 2021, providing about $34 billion in loans. DFA’s research found that 60 per cent of first-time homebuyers got financial help from their parents, with contributions averaging $89,637 in May 2021.
There are several ways parents can help their children enter the market. In this article, our agents outline the different types of parental funding options (other than simply lending or gifting the money), including the positives and pitfalls of each option, along with some important considerations for families thinking about entering into such agreements.
Most of Australia’s largest banks and lenders offer guarantor home loans for parents (or close relatives) wanting to support their children to buy property. A guarantor loan means that parents don’t have to give their kids money. Instead, they can use the equity built up in their home as security for part or all of the deposit.
Having a guarantor means that children can get away with having little to no deposit and avoid paying lenders’ mortgage insurance. However, as both parties are listed on the title, the parents (guarantors) are liable to settle outstanding debts if children struggle to make payments – which may mean their own home could be at stake.
Borrowers and guarantors should seek legal advice to ensure they understand their obligations and consult their lender to ensure the loan is structured to minimise risk. It’s also important to remember that a guarantor home loan can affect the parents’ borrowing capacity moving forward.
Should I help my children now or leave them an inheritance? This question is prompting more and more people over the age of 60 to look into reverse mortgaging to help their children with a home deposit.
As the name suggests, a reverse mortgage operates in the opposite way to a traditional mortgage, allowing people to withdraw equity from their homes to unlock the savings that have built up over time. As a guide, homeowners aged 60 years old can borrow around 15-20 per cent of the value of their home, while homeowners aged 75 years old can borrow around 30 per cent.
Monthly interest compounds over time and increases the loan balance unless monthly interest payments are made, and the loan is generally repaid from the future sale of the home.
Reverse mortgaging is seen as a favourable option for parents, as it allows them to enjoy the comforts of their family home for as long as they wish while reaping the full benefit of capital growth. There are, of course, some potential traps to consider, too, including compounding interest, reduced home equity, and possible age pension implications. Anyone looking into this option should seek legal or financial advice to understand their specific situation before making significant changes.
Another option for parents looking to help their child get into the property market is a joint ownership arrangement with their children. Using this arrangement, you can choose to divide ownership of the property in whichever way you like, such as 60:40 or 50:50. Whatever you decide it goes without saying that any arrangements should be properly documented, which may include drawing up formal rental agreements for the person occupying the property.
While joint ownership sounds straightforward and could be a good solution for some families, there are some important considerations to be mindful of. Such as what happens if someone’s circumstances change and they want to exit the agreement, or if one party can no longer meet loan repayments the other party becomes liable for not just their share, but the full loan amount. Your future borrowing power is also reduced, and where the property is not your main place of residence this could result in capital gains tax liabilities upon its sale.
Whether you’re considering using one of the options outlined in this blog, or simply loaning or gifting a deposit to your children to enter their property market, you should ask yourself these important questions beforehand.
1. Can I afford it now and in the future?
Consider not just your current financial requirements but also your retirement years ahead. Any financial commitment needs to be carefully considered to ensure you won’t be left struggling financially in later years.
2. What are the tax and pension implications?
New financial arrangements can give rise to tax and pension implications, so always seek appropriate professional advice on your situation before committing to something new.
3. How will it affect my other children?
Financially assisting one child could create tensions with other children and potentially cause problems further down the track. Again, always seek appropriate professional advice first, and make sure all agreements are fully documented as well as being added to your will.
4. What are my expectations?
Discuss your expectations for the arrangement beforehand to make sure everyone is on the same page. How much do you expect to be involved in decisions about the property, who will be responsible for the maintenance (and any associated costs), and are you expecting your child to help care for you later in life should the need arise?
Helping a child to enter today’s property market, when prices are high and saving for a deposit is taking longer than ever, can be a great option for some families who are willing and able to give their offspring a leg up on the property ladder. However, like when making any major financial or investment decision, always consider seeking independent legal, financial, taxation or other advice relating to your unique circumstances beforehand.
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