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Bank of Mum and Dad: Another Path to Homeownership
An overview of your options to support your children into their first home.
Andrea Rowlands
23 September 2023
Please Note: This newsletter was originally published on 23rd September 2023. While the information presented here may still be valuable, some aspects may be outdated.
If you or your children face challenges securing a first home, you're not alone. High prices and slow savings can make owning a home seem like an elusive goal, especially for those going it alone. But having a supportive parent or family member can make this dream a reality.
This is your resource for understanding ways to achieve home ownership together. From family loans to gifts and guarantor roles, we're here to guide you. Our goal is to equip you to confidently extend a helping hand, guiding loved ones on their exciting path to owning a home.
And here's encouraging news: Over half of first-time homebuyers today receive family financial support. Yes, the Bank of Mum and Dad often steps in to make this happen. This support takes various forms, like loans, gifts, or being a guarantor.
Remember, it's not just parents – close family members can help too. Let's explore these possibilities and what you need to know.
Family Loans: Defining the Terms
Imagine a scenario where parents or family members lend money to a loved one to go towards their first home. It's a loan, and like any loan, there's an understanding it'll be repaid at some point. But before you dive in, it's important to have an open conversation and set clear terms. Questions to ponder include:
- Is there any interest on the loan, or is it interest-free?
- When is the loan due for repayment? Is it when the property is sold?
- Will the family members lending the money have a say in the type of property bought, or is it a hands-off arrangement?
Once you're on the same page, it's recommended for those providing the loan to consult their lawyer and draft a Deed of Acknowledgment. This document outlines the loan's terms, including repayment specifics.
Gifts: Support with No Strings Attached
Similar to a family loan, a gift involves a sum of money provided by family members, with no catches: it doesn't need to be paid back, and no interest is applied or payments made.
When applying for a home loan, a gifting certificate is required. This certificate states the gift amount, the giver, and importantly, that it's non-interest bearing and there won't be an encumbrance on the title. An encumbrance is a note on the property title showing who is owed money - the most common of which is a bank's mortgage.
However, be aware that under certain circumstances, the courts might consider the gifted money as "relationship property," especially in case of a relationship separation. To navigate this, we recommend you seek legal advice.
Guarantor Support: Sharing the Risk
Another approach is having parents or family members act as guarantors.
In this setup, they use their own assets – often their house – as security for the first home buyers home loan. This enables them to enter the property market without needing significant cash upfront in the form of a loan or gift. Typically, the guarantee covers the amount needed to get to the crucial 20% deposit, so it's only a portion of their property's overall value that is used. This specific portion is set up as a separate loan to be repaid faster.
Remember that if the home owner struggles with repayments, the guarantor will likely become responsible for the loan. Because of this risk, the bank will also assess the guarantor to ensure they have sufficient income to meet the repayments if needed.
As always, it's important for both parties to seek separate independent legal advice before proceeding with a guarantor arrangement to fully understand the potential risks and long term implications, such as what happens if the parents/guarantors want to sell their home and there is still a loan in place.
Whether it's a family loan, a gift, or a guarantor arrangement, clear communication, transparency, and legal guidance are key.
Should you be considering the Bank of Mum and Dad as a means of homeownership support, book a free, no obligation, chat. Our Tella mortgage experts are here to help you navigate this exciting journey.