With Australia’s challenging property market being so hostile for first-home buyers today, a home deposit is one of the most generous gifts a family member can offer. But offering your kid a cash gift to buy a home upfront isn’t as easy as it may seem: how do gifted deposits work?
Before you open the Bank of Mum and Dad for business, let’s look at how exactly it operates.
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Can my child get a home loan with a gifted deposit?
Australians are absolutely able to use gifted money for a home loan deposit, which can make a gifted deposit an invaluable tool in helping your child get their foot on the property ladder and into their own home.
With the current state of Australia’s property market, many young Aussies whose financial situation would otherwise restrict them from buying their first home can do so with the help of the Bank of Mum and Dad.
In Australia, the recommended house deposit is 20% of the property’s value. Paying a lower deposit than this will mean that borrowers also have to pay something called lenders mortgage insurance (or LMI), which helps to ensure a lender can recoup their losses if the borrower cannot keep up with their repayments.
Over time, they will pay back the borrowed money along with interest charged at a fixed interest rate or variable rate. By increasing the lump sum used for the initial home deposit, borrowers can decrease the loan amount needed and therefore lower the interest paid back over time and the loan repayments each month.
If an immediate family member or close friend does choose to give someone a large sum of money to be used for a gifted deposit, there are some extra things to take into consideration.
Providing evidence for a gifted deposit
If you are planning on paying a portion of the purchase price of your home with a cash gift, you will have to provide evidence of two things:
- that the money was gifted to you by legitimate means
- that you will be able to maintain home loan repayments once the gifted money has run out
Many of these requirements will be similar for deposits from inheritances or other large lump-sum cash amounts.
Evidence of a cash gift
With a large lump sum of money suddenly in your child’s account, most lenders will want verification that the cash gift is indeed rightfully theirs to spend and has been accessed lawfully. This may involve demonstrating a gift letter. This is a statutory declaration that states the money belongs to them and does not have any restrictions or need to be repaid.
Some lenders may have other requirements. If you’re unsure of what documentation you’ll need to provide, speak to your mortgage broker or consult the product disclosure statement (PDS) for the home loan in question.
Evidence of genuine savings
Since you’ll be making regular repayments on your home loan, your lender will require some evidence referred to as “genuine savings”. This is made up of any money that is saved over time, whether it’s from work income or investments or other means of saving. It does not include money received via gifts, inheritances, winnings, gambling, or other windfalls.
Genuine savings demonstrate to a lender that you can manage money and add some authority to your ability to make consistent home loan repayments. Most lenders will consider money from a cash gift or inheritance to be a part of “genuine savings” after a set period of time (starting from three months, dependent on the lender).
This also helps to stop people from attempting to buy houses or make home loan repayments on their credit cards, for example.
Are there other ways to help my child buy a home?
If you can’t afford to serve up the cash for a gifted deposit directly or don’t want to, other options can help your family members purchase a property. The most common would be putting your hand up as a guarantor on your child’s property purchase.
Going in as a guarantor on your child’s home loan
If you opt to go on as a guarantor on a home loan for your child, you’ll be using the equity in your own home to act as security for their home loan. The main difference between doing this and giving your child a gifted deposit is that, unlike simply offering a cash gift, you have an ongoing involvement in a home loan if you act as the guarantor.
This will impact your own loan-to-value ratio (LVR), which could have a run-on impact on your ability to refinance or turn your home into an investment property until you are released as a guarantor from your child’s home loan.
How long does a guarantor stay on a mortgage?
There could also be potential issues further down the track should your child begin defaulting on their home loan repayments. Since your home equity is acting as security, you can be called on to assist in making payments, and your assets can even be claimed if the home is sold with negative equity. This can be the source of nasty disputes amongst family members and require extensive legal advice.
If you are acting as guarantor for your child, ensure there is open communication around the ability to make home loan repayments and that their lender is about any hardship in their financial situation before it gets to this point.
Are there any other fees my child will pay if I give them a gifted deposit?
Unless you are gifting your child enough money to pay the entire purchase price of a home upfront, including the associated fees, there will always be costs incurred when buying a home. Make sure your child is aware of all of the fees and costs they will have to pay, which include but are not limited to:
- Stamp duty
- Legal fees
- Conveyancing fees
- Valuation fees
- Loan repayments
- Interest
- Any fees for mortgage brokers
- Fees associated with home loans: establishment fees, account keeping fees, etc
Many of these costs will differ from case to case, but you can use online calculators to help you estimate certain costs.
For instance, OwnHome’s NSW stamp duty calculator will use NSW property law to help work out the stamp duty you will pay on a certain property price in Sydney.
You can also use these to work out how much interest you will pay on the home loans you are looking at.
If your child does receive Centrelink payments or government assistance, they should note that cash gifts are assessed as criteria of the income tests run. If cash gifts received exceed limits, Centrelink payments may be impacted — even if a gift is used to buy a home immediately.
