Do you need the bank of mum and dad to buy property?

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.

Guides
Home Ownership
by
Dawn Teh

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 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 which was 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 prior option is not the choice for you.

Disclaimer: This article is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS), target market determination (TMD), or other offer documents before making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).

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 buying property with it being one of the biggest financial commitments in a person's life.

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 save on daily living costs while they build up their 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.

This is because banks will require a statutory declaration stating that the amount given is a gift and doesn't require the lender to pay it back.

This can complicate your home loan application and delay approval, so it's best to seek professional advice before going down this path.

Guarantor loan

With a guarantor home loan, the 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. 
  • First home buyer 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

  1. 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. 

  1. 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.

  1. Rent-to-own with OwnHome

At OwnHome, we launched a rent-to-own program to help reduce the barriers around homeownership.

All you need is a 3% deposit to get started with us and the application process is free!

(We currently operate in Greater Metropolitan Sydney, Wollongong, Newcastle, Brisbane and the Gold Coast.)

Here's how OwnHome works:

  1. Shop for your perfect home and OwnHome buys it. You pay just 3% of the property price upfront — that's it. At this point, the property is in OwnHome's name.
  2. You move in right away and build your deposit while renting from us. Some of your fortnightly payments go toward your security deposit. Starting living like a homeowner. 
  3. Purchase your home from us after 2-7 years at a set price. Your accumulated security deposit can go towards the purchase of your home.

If you're keen to learn more about OwnHome, use our calculator below to see how we stack up against renting and saving for a 20% deposit.

Discover Your Buying Power With OwnHome

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!

At OwnHome, we specialise in providing first home buyers with a rent-to-own pathway to home ownership.

You can use our calculator below to find out how much you'd save with OwnHome compared to renting and saving.

Discover Your Buying Power With OwnHome

FAQs: Buying property through the Bank of Mum and Dad

Can I buy a house using my parents' house?

It's possible for your parents to put down part of their home equity as security for your own home loan. This is called a guarantor loan. It can help with getting your home loan approved if you cannot come up with the full 20% deposit. 

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