How can your parents help you buy your first home?

Increasing property prices have made it extremely challenging for first home buyers to take the first step on the property ladder. However, parents across the country are keen to help their kids fulfil their property buying dreams by advancing large amounts of money to meet the ideal deposit requirement for a home loan. According to recent research, the “Bank of Mum and Dad” has emerged as Australia’s ninth-largest mortgage lender, with parental contributions rising by almost 20% in the past year.

Seeking help from your parents to purchase a house

There are several ways in which your parents can assist you in purchasing your first home. For instance, your parents could gift you a lump sum of money to increase the size of your deposit. Most lenders accept such gifted deposits as part of your down payment, but you’ll most likely require a letter from your parents substantiating the gift. The letter must state the purpose of the gift. It should also mention clearly that you’re not expected to repay the amount you received as a ‘gift’.

It’s worth noting that even though a gifted deposit may cover 20% of the purchase price of a property, you’ll still need to show at least 5% genuine savings to qualify for a loan with many lenders. However, a handful of lenders may waive this requirement if you are a renter with a solid rental history spanning six months or more. 

Instead of a gift, some parents might feel more comfortable loaning the money to their child. If that’s the arrangement you’ve reached with your parents, consider speaking with a solicitor to draw up a formal loan agreement to prevent any confusion at a later stage, and also understand the tax implications (if any). 

Applying for a guarantor home loan

If your parents are willing to help you with your home loan but don’t have the cash to put towards your deposit, you could explore the option of applying for a guarantor home loan.

Your parents can use the equity in their property to secure your home loan. This means that while your property will serve as the main security for the loan, the lender will also take a mortgage on your parents’ home.

As guarantors, your parents are responsible for paying your home loan in case you default on it. Therefore, it’s advisable to assess your repayment capacity and only ask your parents to guarantee your home loan if you’re sure you’ll be able to service it.

A guarantor doesn’t need to provide security for the entire home loan. It’s possible for your parents to only guarantee a portion of the loan to help you borrow with a low deposit, and without paying for Lenders Mortgage Insurance (LMI). If your parents provide a partial guarantee, they are only liable for that portion if you default on the loan. 

Purchasing a house with your parents

It’s possible to purchase a home with your family members or friends as co-owners. This option allows you to pool your resources with your family to reduce your financial burden while buying a house.

You can take out a joint mortgage with your parents (or anybody else) and co-own the property with them as joint tenants or tenants in common. Joint tenants are equally responsible for the mortgage and share the property equally. On the other hand, tenants in common can divide the mortgage and the property according to the size of their investment, or in any other manner they like. You may connect with a mortgage broker to learn more about joint mortgages. It’s also worth seeking advice from a solicitor to understand your responsibilities as joint tenants and tenants in common to select the right ownership structure.

In addition to seeking help from parents, there are government grants and schemes to help you get into your home faster. For instance, you could use the First Home Owners Grant to supplement the deposit for your first home. There’s also the First Home Loan Deposit Scheme, which is a government guarantee that lets you purchase a house with a 5% deposit and no LMI. Eligibility depends upon the location of the property, your income and the number of places available under the scheme.