You’ve been sticking to your budget; you’ve cut back on all non-essentials and you’ve been diligently saving for years (literally!)…but it still feels like you’re a long way off having that 20% deposit for a home loan. For many younger Australians, the goal of owning your own home feels like it’s drifting further and further away. As a result, prospective first home buyers are looking to family for help in qualifying for a home loan. How Can Your Parents Help You Secure Your First Home Loan? And what other help is out there for first home buyers?
Gold Coast Property Prices Booming
Property prices on the Gold Coast have boomed recently, thanks to a surge in interstate migration and expanded flexibility to work from home. By March 2021, the average Gold Coast house price had increased to $749,950 – that’s over 15% higher than it was just 12 months earlier! For first home buyers trying to save a 20% deposit, this increase in property prices has moved the bar of homeownership to about $20,000 higher.
It’s no surprise then that many first home buyers are looking for support from their parents. In fact, the ‘Bank of Mum and Dad’ is now recognised as one of the top 10 lenders in Australia, with loans totalling about $35 billion (for perspective, that’s more than the Bank of Queensland)!
How Can Your Parents Help You Secure Your First Home Loan?
So, how can your parents help you to secure your first home loan? There are a few different options available for home loan help. These include:
1. Asking them to act as a guarantor
This is one of the most common ways parents can help their kids get a foot on the property ladder. By acting as a guarantor in a parent assist home loan, your parents basically use the equity in their own property as collateral for your home loan. How does this work? Imagine you’ve saved up a 10% deposit for a home loan. To avoid paying Lenders Mortgage Insurance, you need a minimum of 20%. Instead of saving the extra funds, your parents offer the extra 10% from their equity as a form of security. They don’t have to physically hand over the cash, and you qualify for a home loan without paying LMI. Sounds like a winning situation!
Keep in mind though, that when your parents act as a guarantor in home loan help, they become liable if you default on your repayments. In a worst-case scenario, they could lose their home to repay your debt. That’s why a guarantor arrangement isn’t something to take lightly. If you’re thinking about asking your parents to act as a guarantor, start by contacting the experienced brokers at PLS for some free advice tailored to your situation.
2. Receiving a financial gift
If your parents want to give you a financial gift, this can be used to top up a deposit for a home loan. However, most lenders will want to see a history of “genuine savings” as part of your home loan application. If you have no savings and then receive a large cash deposit into your account, the lender won’t view this as “genuine savings”. You’ll either need to show a history of your own savings (at least 3 months) in addition to the cash gift or, you’ll need to hold the cash gift in your bank account (without spending any of it!) for a minimum of 3 months.
3. Accepting a cash loan
Another way that your parents can help you secure your first mortgage is by offering you a cash loan. Keep in mind that, with a cash loan, you’ll need to manage repayments to your mortgage lender and to your parents (which can place you under added financial stress). It’s also important to know that a lender won’t view a cash loan as a form of “genuine savings”.
4. Letting you live with them rent-free
This may not be your preferred option (moving back in with the parents isn’t always the easiest thing to do!), but living rent-free may allow you to significantly boost your savings in a relatively short space of time. If you’ve been paying $500 a week in rent, you could potentially save an extra $26,000 in just 12 months of rent-free living. This also presents minimal financial risk to your parents.
5. Buying a house with your parents
In this scenario, both you and your parents are registered as co-owners on the property title. It may allow you to buy a property much sooner, and it can act as a form of investment for your parents. If you’re considering co-ownership with your parents, it’s important to work through and agree on all the details in advance: Who will live in the house, who is responsible for ongoing costs (council rates, maintenance, insurance, etc.), whether the person who lives in the house will pay a form of rent and what will happen if one party wants to sell their share in the property. A signed agreement is always a good idea in this kind of situation, as it can prevent misunderstandings down the track.
What Other Help Is Available for First Home Buyers?
There are also several government initiatives and many loans from parents to buy a house in Australia available that have been designed to help first home buyers get into a new home faster. These include the First Home Loan Deposit Scheme, Parent Assist Home Loan, the Queensland First Home Concession, and the Queensland First Home Owners’ Grant.
To find out more about how you can buy your first home sooner, just give me a call on Ph: 0421 934 033 or Ph: 07 5597 6049.