Homeownership is a major milestone for young adults, but rising property prices, high interest rates, and the increasing cost of living are making it harder for them to save for a deposit.
In response, the Bank of Mum & Dad has emerged as a popular alternative route to homeownership for many young buyers. Recent research from the Housing Monitor shows that approximately 40% of first-time home buyers now receive support from the Bank of Mum & Dad, a significant increase from just 15% sixty years ago.
It’s evident that this form of assistance has become crucial in helping the younger generation enter the property market. But how can you support your children in achieving homeownership without jeopardizing your own financial security?
Gifting a Deposit
While your children could opt to pay lender’s mortgage insurance (LMI) to bypass the 20% deposit requirement, this would increase their monthly repayments. By gifting the deposit, you can help them avoid this additional cost.
The gift will typically require a letter confirming that the funds are provided unconditionally. You can structure this as an outright gift, a loan with low or no interest, or request a share of the sale proceeds when the home is sold. Whatever approach you take, it’s crucial to clearly document the terms in writing.
Signing as a Guarantor
As a parent or close family member, you can help your child secure a mortgage by signing as a guarantor and using your property as collateral.
This allows your child to avoid paying a deposit or lender’s mortgage insurance (LMI), as your property’s value covers the 20% deposit. However, if your child defaults on the mortgage, you become responsible for the debt, and your property may be at risk to cover the balance.
Financial Considerations for the Bank of Mum & Dad
Helping your children buy a home is generous, but there are important financial factors to consider.
First, understand the tax implications. A no-strings-attached gift generally has no tax consequences, but if you provide a loan, any interest earned must be declared to the ATO. If you’re entitled to a share of the home’s sale proceeds, that amount will likely be subject to capital gains tax.
As a guarantor, if your child defaults on their mortgage, you’ll be responsible for the debt. This could mean selling your property if you can’t cover the payments. Additionally, if you want to sell your own home used as security, you may need to pay off the guarantee or transfer it to a new property.
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