Can your parents help you into your first home?
It’s no secret that raising a deposit can be hard. With the loan-to-value ratio restrictions set by the Reserve Bank many of us will need a 20 percent deposit before we’re able to get our foot in the door (literally). For first-home buyers a $750,000 house could require a whopping $150,000 cash deposit. In our last blog we talked about ways in which first-home buyers can raise money themselves. Some of us though will need additional help. If you’re in this situation it's good to know that there are a few options available for Mum and Dad to give you a hand.
A good old-fashioned gift
Are we talking about the whole deposit? No! We aren't all this lucky but In some cases parents might be able to give you say $30,000 towards a deposit. This, in addition to being much needed capital, could then save you further thousands down the track in interest over a thirty-year loan period.
Giving you a loan
Your parents might loan you a portion of the deposit. If going down this route be clear about the arrangement from the beginning. What’s the interest rate? How often will you make repayments? And most importantly, when will you need to pay the loan off by? Even though they are your parents it’s important to treat the loan like any other.
Using the equity of the family home
A lot of banks offer lending arrangements which allow your parents to use the equity in their home for your deposit.
The first option is where two mortgages are effectively taken out for the purchase of your home. One for the deposit, which your parents are liable for, and one for the rest of the purchase price. The way it works is that the mortgage on the deposit has a shorter loan term and you pay this back first. When this portion is paid your parents and their home are released from the arrangement and you start paying off the rest.
A second option is a loan is taken out by your parents using their house as the security. This a popular way to finance right now. The benefit for you is that the loan can be spread over thirty years and your monthly repayments will be lower. However, this also means that your parents are on the hook for a lot longer.
Being a guarantor
Your parents might act as a guarantor for you by effectively making a promise to the bank that they’ll cover your mortgage payments if you’re unable to make them. Guarantees work best when they are limited to a portion of the loan. For example, your parents might guarantee $45,000 of your loan. This helps you and also limits their risk.
There’s always the option of buying with your parents. They could purchase a percentage of your home and make payments on that share. In this situation the loan can be a lot easier to get as the bank is taking your parent’s equity and income (as well as yours) into account. This arrangement can work well provided everyone has a clear understanding of expectations up front. There’s also the added bonus of you both getting a gain if the value of the property increases.
We’ve got a lot of experience in this area. There are plenty of ways to make this happen and we are good at getting the best for you. If you’d like to find out more call Niran or Vinay on 09 320 3730.