How parents can assist their children with little or no deposit to buy a house.

With house prices being so high, it can be difficult for first home buyers to save up enough deposit to meet the bank’s minimum deposit requirements.  In many cases, the property prices are increasing at a rate far greater than the rate the first home buyer is able to save.

This is where a parent can come in to assist them to meet the deposit requirements of the bank.

There are a few options for parents to assist their children with deposit to purchase a home.  Only two of the four options below will require the parents to have actual cash funds to provide for deposit, which we will cover first.

Gift

The first option is for parents to gift the amount their child is short of deposit to meet the bank’s minimum deposit required.  This can often be considered an early inheritance.  A gift of funds is non-repayable and non-interest-bearing, it is essentially someone such as a parent or family member giving funds to a home buyer, so they can put it toward a house purchase.  A gifting declaration will need to be signed by the person making the gift.

Steps to take:

We have a copy of a gifting declaration that is accepted by all the banks, that can be used if you are wanting to use a gift as part of a house deposit.  We will need to make sure it can be used for your situation, and if so, we can then give you a copy of a declaration that you can take to the person providing the gift.

Deed of Acknowledgement of Debt

The second option is for parents to lend the funds to their child rather than gift to them.  This is often the preferred option, especially where their child is buying their first home with a partner.  By lending the money for deposit using a “Deed of Acknowledgement of Debt”, it means that the parents provide the money for deposit now with the requirement that these funds are to be repaid in the future if the property is ever sold and the bank’s lending repaid.  This protects the funds they have provided in the event their child and partner ever separate and sell the property, as the parents get to call in their debt before any of the sale proceeds are split between their child and the exiting partner.  The parent can then relend the funds to their child to assist them in getting back on the property ladder with their next property purchase.

If a parent or family member has agreed to lend money to help with a house purchase, then a deed of acknowledgement of debt is required to be signed by the borrower, and the person who has offered to loan the money.  The deed outlines the terms in relation to the agreement.

Steps to take:

If you are wanting to use this as an option, check with us first.  We will need to make sure it can be used for your situation, and if so, we can then give you a copy of a deed that can be given to the parent or family member.  We would always recommend both parties obtain independent legal advice before they sign a deed of acknowledgement of debt.

Guarantor’s property offered as security

The third option is useful for parents that do not have the actual cash funds available to provide their child, however, own a property that has a good amount of equity in it (equity is the property value less the total home loan).  A parent or other family member may offer assistance by providing their property to be used as security by the bank for the child’s home loan.  The guarantor can limit their liability so that their guarantee is limited to the dollar amount that their child is short to make up the total deposit required.  The minimum deposit required when using a guarantor is usually 20% of the purchase price.

In a guarantor’s scenario, they are effectively promising to repay the home loan if the borrower can’t, and therefore they are required to provide a home loan application along with supporting documents as if they were applying for a home loan at the amount of the guarantee themselves.

There are a few different ways this can be done and it really depends on the financial position of the person guaranteeing the loan and also the borrower’s financial position.

As a borrower, you can fast track the repayments on the amount that the guarantor has guaranteed, so it is repaid quicker than the rest of the home loan.  Once it has been repaid or your property has naturally increased in value over time, then you can apply to the bank to have the guarantee released.  The guarantor’s liability remains set at the limited amount until the borrower can prove to the bank their loan is less than 80% of their property value.

As an example, if a child wanted to buy a property for $800,000 and only had a $40,000 deposit, they could potentially borrow the full $760,000 that is required to complete the purchase under their name alone.  The loan is secured by the property they purchase and their parent’s property.  The guarantee taken over the parent’s property would be limited to $120,000 being the amount the child is short to have a full 20% deposit.  The parent’s liability will remain at $120,000 until the borrower can prove to the bank their loan is less than 80% of their property value.

When a guarantor is involved, they have to seek independent legal advice, meaning they will have a lawyer different from that of the borrowers to explain to them their obligations under the guarantee.

Steps to take:

If you are wanting to use this as an option, check with us first.  We will need to make sure it can be used for your situation, and we can advise you on how best to involve the guarantor.  We are happy to have an initial conversation with the guarantor to discuss their options and how they can assist.

Co-borrowing with parents against their property for a deposit

The fourth option is also suitable for parents that do not have the actual cash funds available to provide their child, however, own a property that has a good amount of equity in it.  If parents or other family members have equity in their home, they can decide to become co-borrowers with you by using their home as security.  You effectively have two loans; one where just the child is borrowing and using their new home as security only, the second loan is the child co-borrowing with their parents and using their property as security only.

You need to be able to repay both loans.  The loan term for the joint loan with parents is shorter so that it is repaid quicker than your own home loan.  An advantage of this type of borrowing is that your parent’s liability reduces with every repayment made as the joint home loan is repaid.

As an example, if a child wanted to buy a property for $800,000 and only had a $40,000 deposit, they could borrow $640,000 under their name alone, secured solely by the property purchased.  Then the balance of $120,000 is borrowed jointly by the child and their parents, which is secured solely by the parent’s property.  The parent’s liability will reduce with every loan repayment made on the $120,000 loan.

We would always recommend both parties obtain independent legal advice for this scenario.

Steps to take:

If you are wanting to use this as an option, check with us first.  We will need to make sure it can be used for your situation, and we can advise you on how best to involve the parents.  We are happy to have an initial conversation with the parents to discuss their options and how they can assist.

If you are a first home buyer that has little or no deposit and have parents who are keen to help you on your home buying journey or are a parent that is looking to assist their child into achieving homeownership, please contact us today to talk through how the above options can be applied to your situation, and which is most suitable.

Lending criteria are always subject to change.  The information contained in this blog is not tailored mortgage advice; please contact a Connect Me Mortgages Adviser to get tailored mortgage advice for your own financial position.