With Aussie property prices soaring, saving for a deposit for your first home can be a daunting task — especially if you're trying to do it on your own.
This is why many are turning to the Bank of Mum and Dad to boost their savings and get into the housing market sooner.
According to a recent AFR report, over 60% of first-home buyers in Australia receive some form of financial assistance from their parents. The average amount parents are contributing has risen to $93,000 - a 26% increase between 2020 to 2021.
But before you pick up the phone to give mum and dad a call, remember that getting help from parents is not a choice without disadvantages.
Keep reading to find out all you need to know about accessing support from the Bank of Mum and Dad.
And as a bonus, we've included other alternatives if the Bank of Mum and Dad is not available to you.
What does Bank of Mum and Dad mean?
The term "Bank of Mum and Dad" is used in Australia to refer to the financial support that parents and other family members give to their young adult children as they start out in life.
It's typically used in the context of assisting with a home purchase, as many young people struggle to be in the financial situation to make such a large upfront financial commitment.
How does the Bank of Mum and Dad work?
There are several ways parents can provide financial help to children that are looking to buy a home.
Sometimes it can come in the form of indirect help. This includes allowing children to move back in to cut down daily living costs while they save up a deposit.
Financial assistance in purchasing a home can also be more direct. In this case, parents may gift or privately loan their children some money. Alternatively, they might also act as their guarantor in a guarantor loan.
Here's a breakdown of what each option involves:
Private loan or cash gift
Many parents choose to loan or gift their children an amount to buy a home. Gifting is pretty straightforward. But there's just one small issue.
Most Australian lending institutions still require borrowers to demonstrate that they've built up their own genuine savings (money that has been saved over time) in order to qualify for a loan. And, monetary gifts don't usually count towards that. This doesn't mean you'll automatically be declined when they see parental contributions. But the lender will still prefer that you have other evidence of genuine savings (e.g. your own income you've saved over several months). The goal of the lender is to simply ensure that you are able to repay the loan amount.
Sometimes, parents prefer not to give their children money, and this is where they may opt to arrange for a private loan agreement. Unfortunately, this arrangement can be more complicated than gifting. Banks require a statutory declaration stating that the amount given is a gift and doesn't require the lender to pay it back, so if this is not the case it can complicate your home loan application and delay approval. It's best to seek professional advice before going down this path.
With a guarantor home loan, parents act as guarantors for the loan (although some lenders might accept other close relatives).
As guarantors, parents pledge part of their home equity as security for the loan. This can make it easier for you to obtain a home loan with a smaller deposit without paying lenders mortgage insurance.
For example, if you want to purchase a house that's worth $500,000, you'd typically need to come up with a $100,000 deposit (20% of the purchase price). If you only have a $25,000 (5% of the purchase price) deposit, you'd typically need to pay lenders mortgage insurance (LMI) which can cost tens of thousands depending on the property price. This insurance is to protect the lender if you default on the loan.
But, it's possible for you to avoid LMI if your parent is willing to be your guarantor. They'll pledge their home equity to make up the deposit difference (the other 15%) and combine that with your 5% to make up 20%.
However, it's important to remember that if you default on the loan, your parent's home equity will be at risk. So there are some disadvantages to enlisting help from the Bank of Mum and Dad too!
What are the benefits of the Bank of Mum and Dad?
When you get help from the Bank of Mum and Dad,
- You can get help with saving up for a deposit.
- You can enter the real estate market sooner. This can be especially handy in suburbs with rapidly rising house prices.
- You can increase your borrowing power and improve your chances of getting your home loan application approved.
- It can reduce the amount of money you need to borrow from the lender. And this may ultimately also lower your monthly mortgage repayments and interest rates.
What are the disadvantages of the Bank of Mum and Dad?
While getting help from the Bank of Mum and Dad might seem like the option with the least barriers, there are some disadvantages to consider.
Here are the top things to keep in mind:
- Taking money from your parents can be tied up with a lot of emotional and relational dynamics. For example, they might still view you as being dependent on them.
- It can put a strain on parent-child relationships. If things go wrong with the property purchase, or you're unable to make loan repayments, this can lead to feelings of resentment and bitterness.
- There are also financial risks for parents. If they act as guarantor for a mortgage, there's always a chance they could lose the home equity they've pledged.
Alternatives to the Bank of Mum and Dad
If getting help from the Bank of Mum and Dad is not an option for you, don't give up just yet. There are many other pathways that help to make homeownership more accessible.
Here are the top ones to consider:
1. Make use of government assistance programs
There are multiple government grants and schemes that you can apply for to help you along your home-buying journey.
Some of the more notable ones include:
- First Home Guarantee lets home buyers purchase their home with deposits as small as 5% without needing to pay LMI. The government assists by guaranteeing the rest of the deposit amount.
- The First Home Owner grant is a one-off payment given to first-time buyers. The amount varies by state. So do check your state government website for more details about what's available to you.
Check out our ultimate guide to first home buyer government schemes in Australia.
2. Use your super to buy a home
Under the government's First Home Super Saver (FHSS) scheme, you can make up to $50,000 in voluntary contributions to your super which can be used for your property purchase.
Note that employer contributions cannot be withdrawn for buying property.
3. Put down a smaller deposit and pay LMI
If getting onto the property ladder as soon as possible is your #1 priority, looking for a lender that'll approve a home loan with a deposit that's lesser than the usual 20% can help you achieve your goals quicker.
The catch is that you'll have to pay lenders mortgage insurance (LMI). Your LMI premium will depend on your deposit amount and the property price. But it can run into tens of thousands of dollars.
4. Consider whether low deposit alternatives are right for you
Should you get help from the Bank of Mum and Dad when buying a home?
Ultimately, the best option for you depends on your individual circumstances. But enlisting the help of your parents is usually one of the easiest ways to get a head start in the property market. Just be aware that there are disadvantages to this option too so make sure all parties get financial and legal advice before proceeding with this arrangement.
And even if getting help from the Bank of Mum and Dad isn't an option for you, remember that there are many ways to reduce the barriers when buying your first property!