How can mum and dad help me to buy a house?

According to Digital Finance Analytics (DFA), almost 60% of first home buyers in 2021 received financial assistance from the bank of mum and dad in order to get their foot on the property market ladder. On average, parents are lending almost $100,000 to help with their kids' deposit. By this estimate, ‘BOMAD’ is one of the largest lenders in Australia.

So, should you get a home loan from the bank of mum and dad? The answer generally depends on your own particular set of financial and family circumstances. In this article, we look at the five most common bank of mum and dad options, and the pros and cons of family assistance.

What is the bank of mum and dad?

The bank of mum and dad refers to the direct or indirect financial help given to children by their parents to help them purchase a home.

The most common ways parents help are going guarantor on a home loan or providing a cash gift – sometimes with the expectation it will be repaid.

How your parents can help you break into the property market

1. Gifts of cash from parents to children

Gifts of cash are a common and straightforward option to help your kids buy their first home. In the current mortgage market, this will likely be 10 to 20% of the value of the property. If you can afford the entire deposit that can be a good start.

Lenders will typically require a letter indicating the deposit is a gift and that there is no obligation to repay it.

Keep in mind the cash gift can be counted as a relationship asset and divided up in divorce or family court settlements.

While a cash gift can be a simply way to get a deposit together for your kids, lenders want to see that an applicant can save. Evidence of regular contributions to a savings account will prove to the bank they can make home loan repayments on their own.

2. Loan from the bank of mum and dad

To avoid any complications arising from a cash gift, some parents opt to provide their adult children with an interest-free loan. That means the home buyer doesn’t need to borrow so much from the bank or credit union to cover the purchase of the property. But the money isn’t a gift, so it can’t be divided up in a divorce. It remains an asset owned by the parents.

Gift versus loan: which is better?

Not sure whether a gift or loan is the more suitable option?

Here are the differences to consider:

3. Mum and dad buy the property

Some parents are directly buying a property for their kids, negatively gearing the purchase and renting it to their children. The rental income can be used to pay part of the mortgage.

One of the downsides to this option is that the child still doesn’t own the property. However, they may be able to negotiate cheaper rent with their parents to save for a deposit sooner.

This could be a good option for high-earning parents or those with good cash flow. Capital gains tax would be payable on a property purchased and used in this way.

4. Mum and dad buy into the property

You can also buy a property with your parents – both parties are responsible for paying the mortgage. This can strengthen your application, and also share the burden of a deposit, stamp duty, and repayments. If either you or your parents fall behind on repayments, the other party is responsible for covering their share.

If you are buying a house with your parents, both you and your parents will be listed on the property title.

With this type of arrangement, you must decide the ownership split and ownership structure. There are two ways you can buy the property together:

1. Tenants in common: This is a flexible form of arrangement which allows you and your parents to divide ownership of the property in whatever way you like e.g. 70:30 or 60:40. Each owners' stake in the property is typically based on the proportion of their funds they initially brought to the table. Under this ownership structure, each person can sell their share of the property at will.

2. Joint tenancy: Everyone on the property title has an equal share/portion of the property e.g. 50:50. If one joint tenant dies, their share of the property is automatically passed on to the other joint tenant, regardless of their will. It's not possible to transfer ownership of one half without the consent of the other owner.

When buying a property jointly with your parents, it can be beneficial to talk to a conveyancer or solicitor to have everything spelled out in a clear contract.

5. The bank of mum and dad act as a guarantor

A guarantor uses their existing property as security for part or all of the children’s loan.

Loan guarantees are sometimes said to be the riskiest way for parents to help their children get into the property market. It means that in the event of a loan default, the responsibility for repayment transfers to the guarantor. In extreme situations, the guarantor’s own home could be sold to repay large debts. This is unlikely but possible. With this in mind, your parents might consider a limited guarantee, which means that they only have to guarantee part of the loan.

When looking for a guarantor, consider someone close to you. Typically lenders only allow immediate family members to act as guarantors.

If you are considering this option, it can be a good idea to speak to a solicitor before signing on the dotted line.

What are the pros and cons of using the bank of mum and dad?

What may be suitable for one family, may not be the best approach for another.

So, here are the pros and cons to think about if you’re considering using the bank of mum and dad.

Read more: Home Loan Basics

Harrison Astbury

Editor and Financial Analyst

Harrison is InfoChoice's editor and market commentator. With years of experience at some of Australia's largest comparison sites and media organisations, Harrison is passionate about all things banking.

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