The Bank of Mum and Dad
The Bank of Mum and Dad
Entering the real estate market has become increasingly tough in recent years. The median price for a house in Adelaide was $410,000 in 2013 and $740,000 as at Dec 2023.1 Housing affordability has been further eroded by rising interest rates. Becoming a first homeowner in Australia in 2024 is very difficult. More than 60% of first home buyers in Australia receive some form of financial assistance from their parents to buy their first home. 2
Typically, a first homeowner will need to save a deposit. Ideally the deposit would need to be 20% of the purchase price. If the deposit is less than 20% the borrower will normally be expected to pay Lenders Mortgage Insurance (LMI). This is a one-off payment that is non-refundable and is added to the home loan. LMI insures against the risk of the bank not recovering the outstanding loan balance if the borrower is unable to meet your loan payments and the property is sold for less than the outstanding loan balance. It is important to understand that LMI covers the lender, not the borrower. It only pays the difference between what the property was sold for and the outstanding debt. 3 The premium for a $500,000 debt where the deposit was 10% would be approximately $14,429. 4
In South Australia eligible first home buyers who buy a new home valued at less than $650,000 have their stamp duty obligation reduced to nil. The purchase of existing dwellings does not benefit from this concession. For all others they must have their deposit saved plus the stamp duty cost.5 Stamp duty is quite an expense. Stamp duty on the purchase of a $600,000 property would be $26,830. 6
The Bank of Mum and Dad
Accumulating a deposit and the stamp duty expense is quite difficult for many first home buyers. Saving is much harder if they are paying rent as well as all of the normal cost of living expenses the one incurs to live. This has led to the rise of the Bank of Mum and Dad (BoMaD). There are many ways that the BoMaD can assist their children in entering the housing market, each has its advantages and pitfalls.
Gifting all or part of a deposit
Quite a simple strategy of simply giving adult children funds to pay stamp duty or all or part of the deposit. The gift assists the child in avoiding paying LMI. Young adults’ borrowings are normally restricted by their income (borrowing affordability) and not their deposit so any gift will reduce expenses and assist with the capital available to purchase. Most banks will require a statutory declaration verifying the fact that the funds are a gift.
By gifting funds to your child, you are potentially exposing these funds to unintended recipients. This could occur should a relationship breakdown.
Loaning funds
Many parents consider loaning funds at a preferred interest rate to their adult child. The loan should be documented noting repayments and agreed interest rates. As previously noted, borrowings are restricted by affordability of repayments. Loans, regardless of the source will reduce affordability in doing so reducing the size of the loan that your child will be able to negotiate from a regular bank.
Loaning funds to your child may provide protection against unwanted claimants but may adversely impact the amount that can be borrowed.
Joint Ownership
There are two ownership structures that can be harnessed: Tenants-in-common or Joint Tenants.
Tenants-in-common
This allows the parents and child to divide ownership on the proportion that they agree upon. Under this structure if one person dies their proportion is dealt with by their will and can be passed on to whomever they decide.
Joint Tenants
Ownership is split 50/50. If one tenant dies their share is automatically transferred to the survivor regardless of what their will says. It is not possible to transfer a share of the property without the other owners’ consent.
Joint ownership allows earlier access with increased buying power and ever circumstances can change for either party. Any loans will be secured by all of the property regardless of ownership and joint loans will mean each party is 100% liable to the loan. For this to work a clear agreement and exist strategy needs to be in place.
Parents providing a Guarantor
By going guarantor, you agree to assume responsibility for the mortgage if there is a default. 7 Guarantors can be full or part having 100% responsibility or simply a pre-determined part. By having a guarantor, you can have a reduced and, in some cases, nil deposit and do not need to have LMI. Guarantors can be removed in the future. For example, if you had a guarantor for 20% of the loan and you paid off 20% of the loan you could apply to have the guarantor removed.
Having a guarantor can allow you to overcome saving for deposit whilst the guarantor does not have to physically contribute funds. The guarantor is responsible should the borrower not be able to keep up repayments. This could expose the guarantor’s other assets if neither party can repay the debt.
Before entering any arrangement, particularly with a family member it is important to seek advice and understand all of your responsibilities and choices so that the best option for all concerned is taken advantage of.
The Bank of Mum and Dad – MBA Financial Strategists
MBA Financial Strategists have been assisting people with their finances – since 1985.
If you would like to arrange an appointment with one of the financial planning team to discuss your options to assist a first home buyer simply phone the office on tel 8357 3999 and make a suitable time. Alternatively book an appt online using our booking link here – simply select an adviser and choose a meeting day and time that works with your schedule.
Sources
- https://www.valuergeneral.sa.gov.au/News-and-Publications/publisheddataandstatistics
- https://www.finder.com.au/bank-of-mum-and-dad#:~:text=NSW%20parents%20are%20the%20most,collectively%20worth%20about%20%2435%20billion
- https://insurancecouncil.com.au/articles/lenders-mortgage-insurance/
- https://www.homeloanexperts.com.au/lenders-mortgage-insurance/lmi-calculator/
- https://www.revenuesa.sa.gov.au/first-home-owners-grant
- https://www.revenuesa.sa.gov.au/stampduty/calculate-stamp-duty
- https://www.lawbase.com.au/the-risks-of-going-guarantor/#:~:text=Risks%20of%20providing%20a%20guarantee&text=Even%20if%20the%20borrower%20is,borrow%20money%20in%20the%20future
MBA Financial Strategists Pty Ltd ABN 13 008 285 756 is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited, Australian Financial Services Licensee and Australian Credit Licensee. This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.