It’s an unforgettable feeling when you realise you have found your perfect first home. However, it’s an even more yet somewhat distressing unforgettable feeling when you realise that you can’t afford it. Luckily for you and many other first-home buyers, there is a solution to this financial problem: the Bank of Mum and Dad.
The Bank of Mum and Dad is an idiom coined to describe the increasingly popular arrangement where first-home buyers rely on their parents to help them enter the property market. To help you out, I have provided fours ways that the Bank of Mum and Dad can assist you in achieving your great ‘Australian dream’.
Acting as a guarantor
One of the ways that the Bank of Mum and Dad can give you a leg up on the property ladder is to act as guarantor on your mortgage. This means that your parent’s income is taken into account when agreeing on a mortgage deal, thus potentially allowing you to borrow more. As a guarantor, your parents must agree to cover your mortgage payments if you are unable or unwilling to do so. They will only be able to do this if they have a sufficient amount of equity in their own property.
It’s important to know that this strategy should be used with caution. This is because once your parents sign their name as a guarantor, they become legally responsible for paying back the entire mortgage if you fail to make the repayments. Additionally, they will also have to pay for any fees, charges and interests that you accrue. Therefore, if your parents do choose to act as a guarantor, make sure they know exactly what they are getting into before proceeding and you have easy access to legal assistance in case it is needed.
Another avenue that you and your parents can undertake is a joint mortgage. This is a great option if you are unable to purchase the entire property on your own and your parents aren’t keen on being a guarantor. This is because by signing the mortgage application together, you and your parents are both agreeing to be equally liable for the mortgage repayments. Therefore, if you opt for this method, be sure to organise with your folks on how repayments and maintenance will be managed, as well, what the exit plan will be should one party wish to sell.
A common approach is for parents to gift land to their children, whether it be in the form of an existing property or a portion of sub-divided land. If you are considering this approach, it’s highly recommended that your parents first seek advice on the tax implications and do research as gifting land and/or property is a ‘capital gains event’. This means your parents cannot hand it over for nothing, but instead will have to pay capital gains on the market value of the property.
Another way to effectively draw from the Bank of Mum and Dad is to ask them to lend the deposit to you on a commercial basis. Alternatively, your parents may have equity secured in their home and thus by creating a line of credit facility they can on-lend the deposit to you for your first property. In either case, remember to have a formal loan agreement drawn up between you and your parents as well, register with the proper authorities.
While this is arguably the most popular way of parents helping their children secure their first home, where the terms of the loan are not discussed properly, it can result in a breakdown in relationships. Therefore, I recommend having a look at Credi, a web app that helps manage your loan information, track prepayments and record updates. Thus, if there’s ever disagreement over the conditions of the loan, the agreement is readily available to the both of you.
It’s now up to you
It is clear that regardless of how wealthy our parents are or are not, we millennials are increasingly turning to our parents for financial support when trying to purchase our first home. While it’s not exactly a straightforward decision to make, I hope that with the information I have provided, you are now one step closer to determining which approach is most suitable for you and your parents.