Socks and undies from grandma and a home loan deposit from mum and dad.
With properties hovering around all-time record-high prices it is becoming increasingly common for family members to help out first home-buyers to get their first step onto the real estate ladder.
Immediate family members are permitted to give 'non-refundable gifts' to boost the size of a deposit. However, it’s not as easy as it sounds.
In this post-global-financial-crisis era, banks are particularly cautious on their lending policies and practices, so there are a few rules you need to know to make sure your gift meets the bank’s criteria.
Mortgage Broker Daniel Corran from McCombe Finance says about one third of his clients who are entering the property market for the first time have some assistance from family with their deposit.
'In the last four to five years it has definitely been the case that it’s becoming more common,' Daniel Corran
When money is gifted to a property-buyer close to purchase time, a gift letter or statutory declaration needs to be signed by the family member, stating that the money is to be used for the purchase of property and that the loan is unconditional. The rules around non-refundable gifts state that it needs to be from an immediate family member, which includes de facto, siblings, grandparents as well as parents.
Corran says lenders often require that the gift be held in the account for a minimum of three months before purchase application approval.
This is especially the case, Corran says, when a potential home-buyer has less than a 20 per cent deposit saved up, as this is the minimum amount required under the bank’s mortgage lenders’ insurance policy, which protects the bank against the risk of a borrower defaulting on a loan.
Most borrowers also need to demonstrate their own minimum 5 per cent of genuine savings. The bank will sometimes ask to see a person’s previous banking records as evidence that a person is able to save money over a continuous period and is therefore likely to be able to service a home loan.
'The paperwork required regarding the gift differs between lenders,” Corran says. So it’s wise to get some help from a mortgage broker or do your research before submitting a loan application with a non-refundable gift included.
Corran says some families consider using their own home or an investment property as security in a “family-pledge” situation rather than gifting cash, however, if the borrower defaults on their mortgage, then the family member’s property is at risk when it is cross-secured. For this reason, Corran says non-refundable gifts are usually safer for families as there is no recourse against assets.
The final point Corran tells his clients when they’re considering giving a non-refundable gift to a family member is to make sure that it’s not self-sacrificing and that it doesn’t jeopardise the financial position of the gift-giver.
'The giftor should seek independent financial advice for themselves to ensure their viability to give the gift – to make sure it’s not going to significantly reduce the giftor’s standard of living or interrupt their cash flow,' he says.Back to top
A history of giving
Finance journalist and author Peter Cerexhe says there is a long tradition of families helping each other out when it comes to purchasing property.
'These have gone on forever. When I worked as a solicitor you saw it all the time, family helping out their kids. There is a spirit of working cooperatively and people take turns,' Cerexhe says.
Cerexhe says sometimes the beneficiaries of these loans don’t tell their friends that their family is helping them out and the arrangements amongst family members can vary greatly.
After seeing hundreds of clients, Cerexhe noticed a pattern that family loans were more common with families from non-Anglo backgrounds and he says Anglo families can sometimes create unnecessary difficulties when it comes to money.
'Some families can be very relaxed about it, but it’s not something that is easily adopted by the more Anglo culture of individualism and of rights. We have a bit of a problem in this country that we don’t know how to ask our parents for money without it turning into a problem,' Cerexhe says.
'My experience with talking to people from different backgrounds is that while many are worse off than us, many don’t see it as a problem at all - it is the role of the family to establish the next generation. It doesn’t seem to become the problem it seems to for so many others where it makes the relationship toxic,' he says.
'It would certainly be helpful to consider the role of your family assisting with your first home without it becoming a massive guilt problem. A large number of people are doing it.'Back to top
Video content: How to get a loan if you've been gifted a deposit: Heidi Armstrong
Look, you know parents are wonderful, aren't they, for first time buyers, to help chip in and help get them started, because getting a loan, it is really difficult, you know. It's difficult in that it's a big jump and it's a big mindset change. Suddenly we all have to be really responsible when we go out and get a loan.
But I think the thing that first time buyers need to realize is it's great if your parents have gifted you, you know, the 10% deposit, but, from a lender's perspective, we want to see that you really understand what's involved in getting a loan. You're going to have to pay off this loan for a long time. So what we sort of want to see is that you've made a commitment to the process yourself, and that commitment has come from you creating your own pot of genuine savings.
Now genuine savings is something that pretty much all lenders want to see, and if they don't see it, they generally will charge a higher interest rate. Genuine savings really is that you've put a minimum of 5% of the deposit amount that you have saved yourself over a period of no less than three months, and that that has come from sort of regular deposits in from salary.
So we don't want to see that 5% genuine savings comes from lump sums of tax refunds or gifts and so forth. Certainly gifts are fantastic, tax refunds are fantastic, and all of that can contribute to enhancing the deposit and making the deposit larger. But as a first time buyer, you need to show your due diligence, that you're diligent in terms of putting away the pennies yourself over a period of time. Lenders want to see that.
Comparison of First Home Buyer Home Loans
Rates last updated February 21st, 2017.
- IMB Essential Home Loan - LVR <=90% (Owner Occupier)
Comparative rate decreases by 0.15% | Interest rate decreases by 0.15%
August 12th, 2016
- NAB Choice Package Variable Rate - $250k to $749,999 P&I (Owner Occupier)
Interest rate decreased by 0.10%
August 19th, 2016
- NAB Choice Package Home Loan - 2 Year Fixed (Owner Occupier)
Interest rate increases by 0.23%
January 16th, 2017