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

Rates last updated January 25th, 2020
$
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
Greater Bank Great Rate Home Loan - Discounted 1 Year Fixed LVR ≤90% ($150K+ Owner Occupier)
2.79%
3.82%
$0
$0 p.a.
90%
Get one of the lowest rates on the market with this fixed rate mortgage. Available with just a 10% deposit. Guarantor option available. NSW, QLD and ACT residents only.
Easy Street Fixed Home Loan - 3 Year (Owner Occupier, P&I)
3.09%
3.69%
$500
$0 p.a.
95%
Enjoy 3 year fixed rate with no ongoing fee.
State Custodians Low Rate Home Loan with Offset - LVR Over 90% (Investor, P&I)
3.65%
3.67%
$0
$0 p.a.
95%
Variable investor rate available with a 5% deposit. Comes with a 100% offset account. This loan is not available for construction.
BankSA Fixed Rate Home Loan - 2 Year Fixed (Owner Occupier, P&I)
3.04%
4.65%
$600
$10 monthly ($120 p.a.)
95%
Enjoy a 2 years fixed rate with low interest rate and low ongoing service fee.
Greater Bank Great Rate Discount Variable with Family Pledge Home Loan - Up to 110% LVR
3.33%
3.34%
$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.
State Custodians Low Rate Home Loan with Offset - LVR 80% to 90% (Owner Occupier, P&I)
3.20%
3.22%
$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.
Adelaide Bank SmartFix Home Loan - 2 Year Fixed Rate (Owner Occupier, P&I)
2.89%
3.26%
$375
$15 monthly ($180 p.a.)
95%
Take advantage of a locked rate for two years and a full offset account.
Greater Bank Great Rate Home Loan - Construction Loan (Owner Occupier, P&I)
3.91%
3.92%
$0
$0 p.a.
95%
Fund the construction of your new family home with a very competitive variable interest rate. Available with a 5% deposit.
ANZ Breakfree Package Home Loan - 2 Year Fixed (Owner Occupier, P&I)
2.98%
4.45%
$0
$395 p.a.
90%
This 2 year fixed ANZ Breakfree Package rate comes with package discount and product bundle. Refinancers switching to this loan could get a cashback from $1,200 up to $3,500 depending on their loan amount (terms and conditions apply).
Easy Street Standard Variable Special Home Loan
2.95%
2.99%
$500
$0 p.a.
95%
This mortgage combines a very sharp interest rate with a 100% offset account and it's available with a 5% deposit.
State Custodians Low Rate Home Loan with Offset - LVR Over 90% (Owner Occupier, P&I)
3.40%
3.42%
$0
$0 p.a.
95%
Variable rate mortgage with low fees that's available with a 5% deposit. 100% offset account attached. This loan is not available for construction.

Compare up to 4 providers

Rates last updated January 25th, 2020
$
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
loans.com.au Essentials - Variable (Owner Occupier, P&I)
3.04%
3.06%
$0
$0 p.a.
90%
A simple mortgage with a competitive interest rate and no application or monthly fees. Borrow up to $2000000 from a convenient online lender.
Greater Bank Great Rate Discount Variable with Family Pledge Home Loan - Up to 110% LVR
3.33%
3.34%
$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.
State Custodians Low Rate Home Loan with Offset - LVR 80% to 90% (Owner Occupier, P&I)
3.20%
3.22%
$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.
loans.com.au Offset Variable - 80% to 90% LVR (Owner Occupier P&I)
3.12%
3.14%
$0
$0 p.a.
90%
A home loan with no ongoing fees. This loan is available for refinances and purchases.
Macquarie Bank Basic Home Loan - LVR ≤ 90% (Owner Occupier, P&I)
3.39%
3.39%
$0
$0 p.a.
90%
Borrow up to $750K with an LVR ≤ 90% and pay no application fee.
Suncorp Back to Basics Home Loan - Better Together Special Offer $150k+ LVR<=90% Incl. LMI (Owner Occupier, P&I)
3.03%
3.04%
$0
$0 p.a.
90%
Get one free online redraw per month and pay no ongoing fees. Application fees are waived for loans above $150,000.
Easy Street Standard Variable Special Home Loan
2.95%
2.99%
$500
$0 p.a.
95%
This mortgage combines a very sharp interest rate with a 100% offset account and it's available with a 5% deposit.
Greater Bank Great Rate Home Loan - Discounted 1 Year Fixed LVR ≤90% ($150K+ Owner Occupier)
2.79%
3.82%
$0
$0 p.a.
90%
Get one of the lowest rates on the market with this fixed rate mortgage. Available with just a 10% deposit. Guarantor option available. NSW, QLD and ACT residents only.
Well Home Loans Balanced Variable - (Owner occupier, P&I)
2.92%
2.96%
$250
$0 p.a.
90%
A very low variable interest rate for borrowers with a 20% deposit. Add a 100% offset account for $10 a month.
Macquarie Bank Offset Home Loan Package - LVR ≤ 90% (Owner Occupier, P&I)
3.39%
3.65%
$0
$248 p.a.
90%
Enjoy a an offset account with an LVR of ≤ 90% when you borrow up to $750,000.
AMP Professional Package Variable Rate Home Loan - $750,000 and above (Owner Occupier, P&I)
3.09%
3.49%
$0
$349 p.a.
90%
Package your loan with other AMP products and save on rates and fees.
Greater Bank Great Rate Home Loan - Discounted 2 Year Fixed LVR ≤90% ($150K+ Owner Occupier)
2.97%
3.75%
$0
$0 p.a.
90%
A discounted 2 years fixed rate for home buyers. Available with just a 10% deposit. Guarantor option available. NSW, QLD and ACT residents only.
Easy Street Fixed Home Loan - 3 Year (Owner Occupier, P&I)
3.09%
3.69%
$500
$0 p.a.
95%
Enjoy 3 year fixed rate with no ongoing fee.
Greater Bank Great Rate Home Loan - Discounted 3 Year Fixed LVR ≤90% ($150K+ Owner Occupier)
2.97%
3.68%
$0
$0 p.a.
90%
Discounted 3 years fixed rate with no ongoing fees and a redraw facility. Guarantor option available. NSW, QLD and ACT residents only.
ME Basic Home Loan - LVR > 80% (Owner Occupier, P&I)
3.77%
3.79%
$0
$0 p.a.
95%
Borrow up to 95% with this basic, flexible mortgage.
Greater Bank Ultimate Home Loan - Discounted 1 Year Fixed LVR ≤90% ($150K+ Owner Occupier)
2.79%
4.04%
$0
$395 p.a.
90%
Get one of the lowest fixed mortgage rates on the market plus a 100% offset account. Available with just a 10% deposit. Guarantor option available. NSW, QLD and ACT residents only.
Easy Street Fixed Home Loan - 2 Year (Owner Occupier, P&I)
2.99%
3.74%
$500
$0 p.a.
95%
Enjoy 2 year fixed rate with no ongoing fee and a 100% offset account. Available with a 5% deposit.
Greater Bank Ultimate Home Loan - Construction Loan (Owner Occupier, P&I)
3.71%
4.12%
$0
$395 p.a.
95%
Build your new home with a variable interest rate and enjoy a 100% offset account. 5% deposit option available.
State Custodians Low Rate Home Loan with Offset - LVR Over 90% (Owner Occupier, P&I)
3.40%
3.42%
$0
$0 p.a.
95%
Variable rate mortgage with low fees that's available with a 5% deposit. 100% offset account attached. This loan is not available for construction.

Compare up to 4 providers

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