Ways family members can help you get into your first home
For many young people wanting to get into their first home, the bank of mum and dad is a popular option, especially for those that are struggling to come up with the minimum deposit needed.
There are a number of ways that parents and family members can help their kids or grandchildren into their first home, so we thought we would explore a few of these ways below.
Probably the most popular method, is a gifted deposit. This is where a family member gifts a certain amount of money to help the borrower into their home. Generally the one giving the gift will have to sign something saying that the money is indeed a gift and isn’t expected to be repaid. Many banks also like to see that the borrower is contributing at least 5% of the deposit themselves through savings, in addition to the gifted sum. However this is a great way to top up your deposit. Note: if the gift is 20% or more then the 5% proven genuine savings is not required
LIMITED GUARANTOR LOAN
This is a way for those with low deposits, to enter the home buyers market quicker. A Limited Guarantee or Family Equity is where a family member (usually a parent or grandparent) guarantees a portion of the home loan. This is usually done by using the equity in the family members existing property, and this acts as security for part of your home loan. This is a way for parents to help get their kids into a home without having to actually provide any cash and is a popular method for many families. This can generally be added on to any regular home loan, and taken away when and if needed.
DoA – DEED OF ACKNOWLEDGEMENT OF DEBT
Rather than a gift, this is a short agreement drafted by a solicitor to state this is not a gift and WILL be repaid, but for example, upon the sale of the home and will not be interest bearing in the meantime.
In our last post we discussed offset accounts, and this can be a popular way for parents to help out their kids without having to act as guarantor or providing actual cash amounts.
If mum or dad have savings in the bank, this savings account can be made into an offset account against the mortgage, therefore reducing the amount required to be paid on the mortgage. If mum and dad have $100,000 in the bank, they might be able to reduce the mortgage by $3,000 per year (on an interest rate of 3%), and it is only costing them forgoing the small amount of interest (approximately $1,500 per year if they were getting 1.5%). If they require the money at a later stage, it’s able to be drawn on straight away, and the account can be reset to a standard savings account at any time. This is a great way to help out without actually providing any cash, and is less of a commitment than other methods.
All of these options are popular ways for parents to help their kids get into their first home quicker, and we work with these sorts of home loans and deposits on a regular basis. If you’d like to chat about any of the methods mentioned above, give us a call on 03 471 8825 to discuss!