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The bank of Mum and Dad is Australia’s tenth largest lender currently. According to research by Digital Finance Analytics, 55 percent of first-time buyers receive financial assistance from their parents. The average amount lent by parents was reported to be a whopping $89,000!

 
The growing significance of the bank of Mum and Dad
 

There is no denying that more and more first-time buyers are turning to their parents to propel their entry into the real estate market. However, it is not very surprising. According to Mr Martin North of Digital Finance Analytics, “Saving for a deposit is very difficult, at a time when many lenders are requiring a larger deposit as loan to value rules are tightened.” He adds that “the rise of the importance of the bank of Mum and Dad is a response to rising home prices, against flat incomes, and the equity growth which those already in the market have enjoyed.” [Source]

Indeed, with the high property prices and stagnant wages, it is quite impossible for many youngsters to even dream of owning a home unless they receive some help from their parents. As a result, it is not uncommon for parents to lend (or gift) their kids the deposit for a first home, guarantee their home loan or even settle their mortgage repayments for the first year. However, experts warn that the increasing reliance on the bank of Mum and Dad could create disparity in the market. Besides, some parents might feel pressured to take on the extra responsibility of supporting their child’s first purchase despite not being in a position to afford it.
According to Susan, a mortgage broker, it is crucial for parents to take independent financial and legal advice before assisting their children with real estate. “There’s always the risk of relationships turning sour in a family. For example, if the kids are undergoing a divorce, it could lead to several complications. Parents might also find their own property at peril if their child is unable to service the mortgage and they don’t have the cash to make the repayments,” she explains.


So, what can parents do to safeguard their interests?

Well, the most important thing is to set the right expectations from the start. All the parties must be clear about how the costs would be divided if things go awry and put such details in writing. Hiring a professional conveyancer right at the outset could, therefore, be invaluable.

Parents can put their name on the title with the child to protect their interests but the child may no longer be able to access the state-funded grants and stamp duty concessions available to first home buyers. Alternately, parents could use their home or an investment property to guarantee their child’s mortgage instead of loaning cash. Here, instead of guaranteeing the full amount, it is also possible to cap the guarantee to a certain percentage of the price to reduce the liability.


Planning to buy your first home?

If you are planning to buy your first home and don’t have an adequate deposit saved up, you’d need to pay LMI or ask the bank of Mum and Dad to give you some cash or guarantee your mortgage. Whichever option you choose, having a mortgage broker on your team could be a great idea.

Being a seasoned professional, a mortgage broker will assess your financial situation accurately before suggesting whether you (and the guarantor, if any) can afford to service the loan. If not, a mortgage broker may be able to recommend how much loan you can service comfortably as a borrower and what kind of home loan is most suitable for your financial condition and goals. At HashChing, we bring you a growing network of verified mortgage brokers who work hard to bring you the best possible home loan deals for your requirements. Speak to a broker online or fill up this contact form so that we can put a verified mortgage broker in your local area in touch with you.

 

By Vidhu Bajaj,
HashChing Content Writer

 

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