As house prices across Australia continue to soar, more first home buyers are getting financial support from their parents. So much so that the Bank of Mum and Dad has been named the ninth largest mortgage lender in Australia. And with average financial contributions at just under $90,000, the amounts parents are contributing are not insignificant.
One of the largest lenders
A growing number of parents are “gifting” the use of the equity in their own homes to cover deposits and other expenses for their children, often as much as 25 per cent of the property purchase price.
Results from a survey undertaken by Digital Finance Analytics (DFA) estimate that just over 60 per cent of first home buyers are receiving financial assistance from their parents, with average contributions amounting to around $90,000, enough for a 20 per cent deposit in most of the country’s postcodes outside of Melbourne and Sydney.
“It may be $10,000, $20,000 or $50,000, but there is definitely a large portion of first home buyers that are getting a hand from mum and dad,” says Martin North, founder of Digital Finance Analytics (DFA).
“It is often just topping up, so that the first home buyer gets to a lower loan-to-valuation ratio, so that they do not have to pay expensive lenders’ mortgage insurance,” he says.
Lenders’ Mortgage Insurance (LMI) is generally levied on borrowers with a deposit of less than 20 per cent of the property purchase price, to safeguard the lender against any shortfall should a property be repossessed and sold for less than the outstanding mortgage. LMI can amount to several thousand dollars and is often a stumbling block for first home buyers.
Protecting yourself from financial risk
But parents need to ensure that they’re not putting themselves at financial risk for the sake of helping their children buy a first home.
Equity gifts, loans or any other financial arrangements should be properly documented to avoid financial and legal problems that could undermine family relationships. Parental loans also have tax implications, and could impact social security benefits such as the age pension.
And it’s worth noting that a parental contribution may not be enough to get your child’s home loan application over the line. Lenders will still want to know that borrowers can support themselves and repay their mortgage, and that they’ve made an effort to save at least 5 per cent of the deposit themselves.
Before embarking on any financial journey to help your child or family member buy their own first home, it’s vital you seek sound financial and legal advice. Talk to a Mortgage Express mortgage broker about your options for releasing equity to help cover a deposit or other home loan expenses and help your child get a foot onto the property ladder.
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