For many young people wanting to get into their first home, tapping into the ‘Bank of Mum and Dad’ is a popular option, especially for those struggling to save enough of a deposit.
For parents who are wanting to help their children into their first home, there are a number of options available, each with their own pros and cons. Let’s take a look at a few of the most popular…
The most popular way that parents help their children into a first home is through a gifted deposit. This is where a parent or grandparent gifts money towards the borrowers deposit. When using gifted money, banks often like to see that the borrower is contributing at least 5% of the money themselves, however if the deposit is over 20%, then this isn’t required. When using gifted money to buy a home, both parties often have to sign something stating that the money is indeed a gift and doesn’t need to be paid back.
LIMITED GUARANTOR LOAN
A Limited Guarantee or Family Equity Loan is where a family member guarantees part of the borrowers loan. Usually this is done by way of equity in the guarantors home and acts as security for the new loan. This is a good way for parents to help their kids into a home without having to actually provide any cash.
Another popular way parents can help without having to hand over any cash is through an offset account. If mum and dad have savings in the bank, then this savings account can be turned into an offset account against the loan, reducing the amount to be paid on the mortgage.
For example if the parents have $100,000 in the bank, they could reduce the mortgage by $5,000 per year (on an interest rate of 5%). The only cost to them is missing out on the interest that they might otherwise get (eg $3,000 on an interest rate of 3%). If the money is needed at any stage, it can be easily changed back to a regular savings account and the money can be drawn down on.
DEED OF ACKNOWLEDGEMENT OF DEBT
This is where money is provided by the parents for the purchase of a home, but instead of it being a gift, it is acknowledged that the money will be repaid. This could be on the sale of the home or in a certain timeframe. Interest does not normally accrue on this type of debt.
If you’d like to discuss any of these options in more detail, then don’t hesitate to get in touch with us here at Better Choice Home Loans. We work with many first home buyers and are well versed on the ins and outs of gifted deposits and other forms of parental assistance.