With the challenges of high housing prices and strong competition, first-time buyers are looking towards financial assistance from their parents to get their foot on the property ladder. According to Digital Finance Analytics, an estimated 55% of first-time buyers are now receiving help from mum and dad or other family members in order to kick start their property journey.
With slow wage growth and records high property prices, saving for a deposit can take years to achieve. Many are now looking to bypass that struggle with parents now tapping into their own savings or assets to assist and provide security.
How are mum and dad helping?
Parents are assisting in three key ways:
- Offering funds toward their child’s deposit as a loan. In this case, the terms of the loaned funds need to be clearly set out in a loan agreement that is recommended to be drawn up via a lawyer
- Providing funds toward their child’s deposit as a gift. In this case, a statutory declaration needs to be signed by the parent stating that the funds are a ‘non refundable gift’
- Guarantor loans have increased 14% year on year for the last 3 years. This is where the parent offers up an existing property to act as security for their child’s purchase. This will ensure their child avoids having to pay Lenders Mortgage Insurance on their finance application
The bank of mum and dad has been seen to be an increasing trend however it must be understood that is this action does come with risks that need to be managed.
Risks and arrangements to consider
Setting in motion a clear agreement is an important step to understand the terms of the contribution and expectations. Although the intention of the financial assistance is to ensure a smoother passage to home ownership, it can result in problems further down the track if the terms of the assistance is not clearly understood and agreed to.
Below are some questions that are commonly asked when a parent is considering to offer financial assistance to a loved one:
- Is the financial assistance expected to be repaid?
- What is the timeframe in which the assistance needs to be repaid?
- Will there be interest charged?
- Will there be a formal agreement?
- What happens if there is a relationship break-up or unforeseen events?
- What happens if the parents need their money back ahead of time?
Awareness is key
Despite contributions from mum and dad, many forget that lenders do require evidence of clear and consistent savings in order for a mortgage to be obtained. Validating the capacity to save so the applicants can prove they are ready for a mortgage is a key step when entering the property market. Nearly all lenders what to see savings statements to understand an individual’s financial capacity to acquire a home loan aside from any financial assistance.
Using parent’s money can provide opportunity and eliminate costs however there are risks and pitfalls that need to be acknowledged. Setting concise terms through a formal arrangement will provide the certainty and confidence should any expected events occur. Researching and finding alternatives are also encouraged with the recommendations of consulting with a professional to gain an opinion and insight.