By Guest Blogger, Louisa Sanghera, Principal Broker,
Zippy Financial
In 2021, the Bank of Mum and Dad became Australia’s 9th biggest mortgage lender.
That’s right: according to research from Digital Finance Analytics (DFA), parents were responsible for lending hundreds of millions of dollars to their kids last year, to help them get on the property ladder.
But is it really “helpful”?
Or does it just set your kids up for poor savings habits and bad money management from the get-go?
The bank of Mum and Dad: a silver spoon?
You may be wondering whether giving your kids a property leg up is a short-cut that could harm them in the long run, or something that will genuinely help.
Here’s the truth of the matter: it’s not likely to spoil them, harm them, or give them a massive short-cut that prevents them from learning strong money management skills on their own.
And there’s one big reason for this: the banks won’t allow it.
In the 15 years or so since the GFC, Australian banks and lenders have had to reform the way they review loan applications and lend money. They have to be more responsible when they hand out loans, to ensure the person signing the loan docs can actually afford it.
This means a set of parents could hand over $50,000, $150,000 or even more to their kids to help with a home loan deposit - but if you the actual buyer (i.e. the child) can’t prove to the bank that they can afford the loan repayments, they’re not going to be approved for the loan.
Banks and lenders also want to see evidence of “genuine savings” from loan applications.
This means that you can’t provide them with the full deposit. They need to prove that they have saved at least a small portion of their deposit, to demonstrate to the lender that they are responsible with money and can handle taking on a big debt.
How can parents legitimately help their kids with a deposit for their first home?
If you’re keen to help your kids get on the property ladder, there are a few different options for providing help. These are the most common ones:
• Cash gift - handing over a lump sum of cash to assist with the deposit is the obvious one. However as mentioned above, even with a cash gift, banks will still want to see evidence of genuine savings. Generally, for the parent’s gift to be classed as genuine savings it has to be in the kid’s bank account for 3 months. The parents will need to give the kids a stat dec stating that the money they are giving them is a non-refundable gift.
• Guarantor loan - also known as a Family Guarantee Loan. This is when you guarantee part of your child’s loan to the bank. You don’t have to hand over any actual cash, but you do offer the bank your property as additional security that allows your child to borrow a higher loan amount without mortgage insurance. This usually involves tying your property to your kids’ loan as extra security. The big risk here is that the bank could repossess/force you to sell your home if your child falls drastically behind on their loan repayments and the sale of their property does not recoup the full loan amount. Guaranteeing a loan in this way may also affect any future lending options that you may have.
• Joint venture - this can be a real ‘win win’ if structured correctly. It means that you and your child buy a property together: your half is an investment, and their half is owner-occupied. Their flatmate could pay you rent, while they pay their own mortgage. Or you might supply the full deposit, and they pay the full mortgage each week. After a certain amount of time, you end the joint venture, and your child buys you out. You’ve helped them get their foot on the property ladder, without sacrificing your own finances along the way.
Which option of all of these is the safest? It really depends on you and your child, your personal situations, and your long-term goals.
A broker can help you crunch the numbers and work through the different options if you’d like to know what might be possible. Keep in mind that many mainstream banks will decline loans that are a little “out of the ordinary”, but as experienced brokers, we work with different lenders every day where we can put forward your unique case and find the right loan structure and solution for you. Contact us today on 1300 855 022 or visit www.zippyfinancial.com.au
Louisa Sanghera - Director and Principal Award-Winning mortgage broker at Zippy Financial
Louisa created Zippy Financial after a 25-year career in banking, with the goal of using her expert financial knowledge, vision for exceptional customer service and passion for property to help her clients grow their wealth through smart property financing. Whether you are looking to buy your first home, re-finance or build your property investment portfolio, Louisa and her team of experienced brokers can help guide you through the challenging maze of finding & securing exactly the right loan for you.
M: 0414083522 or 1300 855 022
E: louisa@zippyfinancial.com.au
Connect with Louisa Sanghera on LinkedIn
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