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Bank of mum and dad still a key property option for new buyers

Posted: 13 September 2017 3:16 pm
News

Mother and father signing contract

Learn how you can help your kids get into the property market while avoiding risk.

It’s becoming increasingly common for parents to help their kids get a foot on the property ladder. And with house prices soaring, it’s easy to see why.

The latest figures from CoreLogic show the median capital city dwelling price in Australia is now $645,405. The situation becomes even more dire when examining Sydney, where the median price is an astounding $909,914.

With lenders requiring at least a 5% deposit in order to qualify for a home loan, it’s little wonder kids are turning to their parents for help. Here’s what you need to know before you open up your wallet.

Guarantor loans can be a solution

Few people are so fortunate as to have large amounts of cash readily accessible. So if you want to help your kids get into the market but don’t have liquid assets to hand them for a deposit, you could consider a guarantor loan.

A guarantor loan is structured to take the place of a deposit by using your property as security. Basically, a second mortgage on your home acts as the deposit for the mortgage on your child’s property.

There are a few notable upsides to this:

  • Deposit. You don’t have to come up with cash to help cover a deposit. The equity in your home does the work for you.
  • Avoid LMI. A guarantor loan can help your kids avoid paying costly lenders mortgage insurance (LMI) premiums. LMI is charged on home loans with a loan-to-value ratio (LVR) below 20%. If you use the equity in your home as a guarantee, it can serve as the 20% deposit, eliminating the need for LMI.
  • Temporary. Guarantor loans are a temporary situation. You aren’t on the hook for the long-term. Instead, as soon as your child has built up 20% equity, you can be released as guarantor and your obligation ends.

Now, the primary drawback of these loans is that you’re risking the equity in your home. If your child defaults on their home loan, you’re liable for part of the debt. This can be a risky proposition, so it’s important to be realistic about your child’s financial discipline and ability to repay.

Learn more about guarantor home loans

Gifting a deposit

Illustrated hand holding a present
If you are in the position to give your kids a sum of cash to help make up a deposit, this is certainly an option. However, there are a couple details you’ll need to consider.

First, your child will still need to come up with some genuine savings on their own. Lenders are generally happy to accept a monetary gift as a portion of a deposit, so long as the borrower has some genuine savings. Usually, the threshold is 5%. Genuine savings generally means money held in an account for three months or longer. If your child can come up with 5% of the purchase price of a property, you’re free to help fund a bigger deposit.

Second, the gift has to actually be a gift. This means you can’t just lend your child money with the expectation that it will be paid back. Lenders would look at this as another debt, which would reduce your child’s borrowing power. Instead, you’ll need to sign a statutory declaration indicating that the funds you’re supplying are a gift and do not have to be repaid.

It’s good to have skin in the game

While helping your child get into the property market can be emotionally rewarding, it can also be dangerous if they don’t have any of their own funds on the line.

Research from the Reserve Bank of Australia shows that 30% of borrowers who need help from their parents to pay for a deposit later find themselves in financial stress.

Making sure your kids supply some up-front funds themselves can help them develop the financial discipline they’ll need in order to keep on top of home loan repayments.

Get it in writing

Helping your kids get into the property market is a big commitment. In order to safeguard your own financial future you need to make sure you outline clear expectations.

If you’re giving deposit funds as a gift, there may be no strings attached. However, if you’re serving as a guarantor for your child’s home loan it can be crucial to lay out your expectations in writing.

It could be worth consulting a solicitor before you choose to serve as a guarantor. They can help you outline clear expectations and a timeline in which you expect to be released from your guarantor obligations. Being clear and transparent about your expectations can not only protect your financial future, it can protect your relationship with your kids.

Ready for the next step? Compare guarantor and low deposit home loans

Data indicated here is updated regularly
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Loan purpose
Offset account
Loan type
Repayment type
Your filter criteria do not match any product
Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
Sydney Mutual Bank Special Fixed Home Loan - 3 Year (Owner Occupier, P&I)
2.28%
2.86%
$250
$0 p.a.
95%
A competitive fixed rate loan for home buyers. Available with a 5% deposit.
Endeavour Mutual Bank Special Fixed Home Loan - 3 Year (Owner Occupier, P&I)
2.28%
2.86%
$250
$0 p.a.
95%
A competitive 3 year fixed rate loan for home buyers. Available with a 5% deposit.
Newcastle Permanent Building Society Fixed Rate Home Loan - 1 Year Fixed (Owner Occupier, P&I)
2.49%
4.12%
$595
$0 p.a.
90%
A fixed rate loan which allows extra repayments, and charges a low application fee.
Greater Bank Great Rate Home Loan - Construction Loan (Owner Occupier, P&I)
3.66%
3.67%
$0
$0 p.a.
90%
Fund the construction of your new family home with a very competitive variable interest rate. Available with a 10% deposit.
Newcastle Permanent Building Society  Premium Plus Package Fixed Rate - 2 Year Fixed (Owner Occupier, P&I)
2.44%
3.76%
$0
$395 p.a.
95%
$2,000 refinance cashback
Enjoy a discounted fixed rate and the ability to package the loan with other financial products. $2,000 cashback for eligible refinancers borrowing $250,000 or more.
Aussie Select Basic Fixed Rate Home Loan - 1 Year Fixed LVR over 80% (Owner Occupier, P&I)
3.09%
3.42%
$0
$0 p.a.
95%
Newcastle Permanent Building Society Fixed Rate Home Loan - 3 Year Fixed (Owner Occupier, P&I)
2.59%
3.86%
$595
$0 p.a.
95%
Split you home loan for free with one of the lowest fixed home loan rates.
CUA Achieve Variable Home Loan - $500k+ (Owner Occupier, P&I)
2.55%
2.60%
$600
$0 p.a.
95%
Home buyers can get a competitive, low-fee variable rate plus a 100% offset account. Low deposit option available. Eligible new home buyers with low deposits can apply for the First Home Loan Deposit Scheme with this lender and avoid LMI costs. Eligible refinancers can get a $2,000 pre-paid credit card when they switch to CUA.
Newcastle Permanent Building Society Premium Plus Package Home Loan - Tier 1: below $500k (Owner Occupier, P&I)
3.77%
4.15%
$0
$395 p.a.
95%
$2,000 refinance cashback
No application fee and 100% offset account. $2,000 cashback for eligible refinancers borrowing $250,000 or more.
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Compare up to 4 providers

Data indicated here is updated regularly
$
Loan purpose
Offset account
Loan type
Repayment type
Your filter criteria do not match any product
Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
CUA Achieve Variable Home Loan - $500k+ (Owner Occupier, P&I)
2.55%
2.60%
$600
$0 p.a.
95%
Home buyers can get a competitive, low-fee variable rate plus a 100% offset account. Low deposit option available. Eligible new home buyers with low deposits can apply for the First Home Loan Deposit Scheme with this lender and avoid LMI costs. Eligible refinancers can get a $2,000 pre-paid credit card when they switch to CUA.
Westpac Flexi First Option Home Loan - Basic Variable Rate (Owner Occupier, P&I)
2.29%
2.72%
$0
$8 monthly ($96 p.a.)
95%
Up to $3,000 refinance cashback.
A flexible and competitive variable rate loan. Eligible borrowers refinancing $250,000 or more can get $2,000 cashback per property plus a bonus $1,000 for their first application. Other conditions apply.
Greater Bank Great Rate Discount Variable with Family Pledge Home Loan - Up to 110% LVR
2.68%
2.69%
$0
$0 p.a.
110%
Pay no deposit or LMI and get a discounted rate with this family pledge loan. Requires a family member to act as guarantor. NSW, QLD and ACT only.
IMB Budget Home Loan - Special LVR  ≤90% (Owner Occupier, P&I, NSW and ACT borrowers only)
2.78%
2.84%
$449
$0 p.a.
90%
NSW and ACT customers only. You can get an interest rate discount for a limited time with this competitive variable mortgage.
Macquarie Bank Basic Home Loan - LVR ≤ 90% (Owner Occupier, P&I)
3.04%
3.04%
$0
$0 p.a.
90%
Borrow up to $750K with an LVR ≤ 90% and pay no application fee.
homeloans.com.au Low Rate Home Loan with Offset - LVR 80% to 90% (Owner Occupier, P&I)
2.74%
2.76%
$0
$0 p.a.
90%
Save on interest with a free 100% offset account and buy your property with just a 10% deposit. This loan is not available for construction.
Yard Variable Home Loan - LVR 90% (Owner Occupier, P&I)
2.65%
2.68%
$0
$0 p.a.
90%
A competitive variable rate for home buyers with 10% deposits saved. Optional offset account (with $10 monthly fee).
HSBC Home Value Loan - Promotional Offer LVR 90% (Owner Occupier, P&I)
2.69%
2.70%
$0
$0 p.a.
90%
A competitive value home loan with no ongoing fee.
Newcastle Permanent Building Society Fixed Rate Home Loan - 3 Year Fixed (Owner Occupier, P&I)
2.59%
3.86%
$595
$0 p.a.
95%
$2,000 refinance cashback
A low 3-year fixed rate with the option to split your loan for free. $2,000 cashback for eligible refinancers borrowing $250,000 or more.
Tic:Toc Live in 10% deposit Variable Rate - Principal & Interest
2.19%
2.20%
$0
$0 p.a.
90%
Get a very low interest rate and pay no application, settlement or valuation fees. Apply online for full approval in real time and add a 100% offset account for $10 a month.
Hunter United Fixed Home Loan - 2 Year Fixed (Owner Occupier, P&I)
2.19%
2.71%
$350
$0 p.a.
90%
Lock in a competitive rate for two years. Available with a 10% deposit.
IMB Fixed Rate Home Loan - 3 Year Fixed (LVR 90% Owner Occupier, P&I, NSW and ACT borrowers only)
2.39%
3.08%
$449
$6 monthly ($72 p.a.)
90%
NSW and ACT customers only. 3 years fixed interest terms and free access to redraw facility online. Available with a 10% deposit.
Greater Bank Great Rate Home Loan - Discounted 1 Year Fixed with Family Pledge Home Loan  Up to 110% LVR (Owner Occupier)
1.99%
3.52%
$0
$0 p.a.
80%
Requires a family member to act as guarantor.
Get one of the lowest rates on the market with this fixed rate mortgage and borrow more with help from a family guarantor. NSW, QLD and ACT residents only.
Newcastle Permanent Building Society  Premium Plus Package Fixed Rate - 1 Year Fixed (Owner Occupier, P&I)
2.39%
3.85%
$0
$395 p.a.
95%
$2,000 refinance cashback
Enjoy a competitive rate with no application fee for this package loan. $2,000 cashback for eligible refinancers borrowing $250,000 or more.
Greater Bank Ultimate Home Loan - Construction Loan (Owner Occupier, P&I)
3.46%
3.88%
$0
$395 p.a.
90%
Build your new home with a variable interest rate and enjoy a 100% offset account. 10% deposit option available.
Newcastle Permanent Building Society Real Deal Home Loan - Special Offer 1 (Owner Occupier, P&I)
2.59%
2.63%
$595
$0 p.a.
80%
$2,000 refinance cashback
$2,000 cashback for eligible refinancers borrowing $250,000 or more.
IMB Fixed Rate Home Loan - 3 Years Fixed (LVR ≤90% Investor, P&I, NSW and ACT borrowers only)
2.64%
3.56%
$449
$6 monthly ($72 p.a.)
90%
NSW and ACT customers only. A 3 years fixed rate investor which allows extra repayments to be made.
Newcastle Permanent Building Society Fixed Rate Home Loan - 2 Year Fixed (Owner Occupier, P&I)
2.54%
3.98%
$595
$0 p.a.
95%
$2,000 refinance cashback
Borrow up to 95% LVR of the value of the property you're buying and pay no ongoing fees. $2,000 cashback for eligible refinancers borrowing $250,000 or more.
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