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It’s a term that’s been thrown around a lot in the last few years, but the Bank of Mum and Dad was around long before the recent surges in Australian property prices. If you’re trying to get onto the property ladder, you might be wondering – do I need help from my parents to get there?
With some fearing that the Bank of Mum and Dad is fostering an existing wealth gap, it may seem like buying a property will remain out of reach without your parent’s assistance. We explain what the Bank of Mum and Dad is and how much of Australian lending it makes up. We also look at how lenders view parental contributions in a home loan application and if they’re necessary to buy a home.
The Bank of Mum and Dad refers to direct or indirect financial help given to children, usually first time buyers, by their parents to help them purchase a house. It’s a colloquial term, but it’s become a popular way to refer to parental financial help in relation to buying homes.
This help can take the form of:
It’s hard to say exactly, recent analysis has suggested that parental contributions are now averaging more than $89,000 each, which is a 20% increase over the last 12 months.
The total contribution from the Bank of Mum and Dad is around $34 billion in loans, making it the ninth largest source of residential mortgage lending in Australia.
However, the Productivity Commission doesn’t believe parents are necessarily gifting their children large sums of money to help them get into the housing market. Rather, the help is in smaller and more indirect amounts, making house price growth a likely cause of growing wealth inequality.
Still, for first home buyers looking to get into a property market where house prices are at record highs, the prospect of doing so without help can be daunting.
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Considering parental contributions form a substantial amount of home loan lending in Australia, how does this fly with lenders? If you’ve been gifted money from your parents to fully or partially pay for your deposit, you’ll have to provide evidence to your lender that the money does not need to be repaid. This can be in the form of a gift letter signed by your parents.
It’s important to note that lenders don’t usually consider gifted funds as evidence of genuine savings. Genuine savings are savings a borrower has accrued over time (usually at least three months). Lenders require proof of this because it shows you can responsibly manage your finances. Definitions of genuine savings can vary by lender, but generally include:
This isn’t to say you can’t get a loan with gifted money from your parents – it just means you’ll need evidence of at least some money you’ve saved up over time. Some lenders even count rent as genuine savings, because it can show you have capacity to repay a loan.
Because a guarantee is a binding contract, it is not considered a financial gift even though the guarantee covers the borrower’s deposit. But, lenders will still thoroughly assess all aspects of both the borrower and the guarantor’s financial situation. Lenders will make sure:
This way, lenders can feel more confident the borrower will pay off the entirety of the loan even though they haven’t paid for their deposit with genuine savings.
In short, no. However, it’s understandable that more borrowers are turning to parental help to get their foot on the property ladder. This is largely due to how difficult it has become to save for a home amid massive house price growth.
But, it’s certainly possible to get into home ownership without the Bank of Mum and Dad. Here are some tips for aspiring homeowners who don’t have parental contributions to help with the purchase of a home.
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If house prices in the area you want to buy in are a bit out of reach, rentvesting could be a solution. Rentvesting is when you purchase an investment property in an area you can afford and continue renting in the spot you prefer to live in.
While it does still require an initial deposit, a smart investment can generate rental income and help you build up your equity. This makes purchasing another property in a more ideal location easier down the track.
If you’re eligible, government schemes for first home buyers can save you money when it’s time to buy a house. Many are for first home buyers specifically, like the First Home Owner Grant and the First Home Super Saver Scheme. You might also be eligible for stamp duty concessions.
If you’re struggling to save up a large deposit, you might still be able to get a home loan with certain lenders. Some lenders offer home loans for borrowers with deposits as little as 5%, so be sure to consider all your options.
As a general rule, borrowers with a deposit of 20% or more won’t have to pay Lenders Mortgage Insurance (LMI). Borrowers with a deposit of less than 20% typically have to pay LMI, which is a fee that covers the lender in the event you default on your home loan.
Many borrowers will wait and save up a bigger deposit, but this isn’t ideal for everyone. It could be worth weighing up the cost of LMI versus the cost of waiting to get onto the property ladder and potentially paying more for a house.
This one might be self-explanatory, but saving up as much as you can to put towards your deposit can be worth the wait. Although it means you might have to delay purchasing your dream property, it also means that you won’t have to pay LMI and can demonstrate excellent saving habits to your lender.
Are you searching for the right home loan for your financial situation? Whatever your needs, Lendi is here to help. Book an appointment with one of our friendly Home Loan Specialists at a time that suits you.
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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.
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