Saving for a deposit
When you get to an age where you don’t want roommates anymore, hang a picture anywhere you please and have your money go towards your own investment – not someone else’s – you start thinking about buying your own home.
A quick search of any real estate website, however, can strike despair into the hearts of many a prospective first home buyer. Prices can seem like they’re getting beyond reach and the chances of you securing a property on your own might be slim. An average house in some parts of Australia can cost $1 million dollars. That means you’d need to save at least $100,000, plus all the extra costs that come along with buying a property like stamp duty, legal costs, inspections, and lenders mortgage insurance if borrowing over 80% LVR.
Can your parents help?
It is becoming more and more common nowadays for parents to help their children get a foot on the property ladder. If your parents are in the fortunate situation to be able to help you out financially then there are a few ways they can do this.
One of the most common ways to assist their children is for parents to guarantee the loan or at least part of the loan. By guaranteeing the loan, first home buyers don’t need to save as much of a deposit. The parents’ guarantee can be secured by a mortgage against the equity in their own home or another investment property.
Another way is for parents with savings to gift you or lend you the deposit.
What are the risks?
What stops many parents who might be otherwise willing to assist their children is the risk factor. They have worked long and hard for their financial security and no matter how reliable or honest their children are, they are still subject to the same risks that effect every home owner. Contributing to a child’s home loan may put their own financial security at risk if there is an economic downturn, redundancies or relationship failures in their children’s lives.
There are ways to limit that risk, however. There are banks that, for example, can limit your parents’ risk by ensuring their guarantee is only to the amount for which they have guaranteed you (e.g. 20%). The security for the guarantee is often released once you have paid down a proportion of the loan.
You could also purchase the property as tenants-in-common so that your parents own a piece of the property proportionate to how much they are putting in. Families should obtain independent legal and tax advice before deciding what to do. Many banks will require this as a precondition to a guaranteed loan. If you are thinking this might be an option for you and your family, here are a few tips:
- Speak to your mortgage broker about your options, find out what is involved and offered by different lenders.
- Bank costs may increase by a bit, but not prohibitively so and settlement on your new property may need to be a bit longer to enable everything to go smoothly with the finance.
- Your parents should also receive their own independent legal advice to enable them to make the best choice for themselves.
- If this is something that you would like to do for your children, make it very clear what you are proposing and what the boundaries are.