The housing market in Perth and across Australia is difficult to break into and more and more first time home buyers are looking to the Bank of Mum and Dad for assistance.
There are various ways in which the team here at Loan Monster help customise home loans for first home buyers getting parental assistance.
But is it a good idea to get assistance from your parents to help you buy a home, even if they are more than willing to assist? Let’s take a look and find out.
How Parents Can Help With Your First Home Buyers Mortgage
There are a few different ways in which parents can help one buy a home. From gifting you money to be used as a deposit to outright jointly owning the house and helping to fund the regular monthly repayments, the right arrangement for you will depend on the individual circumstances and preferences of both you and your parents.
Option 1: Guarantor for the Loan
One of the most common ways in which parents can help secure a first time home buyer’s mortgage is by guaranteeing your home loan. By “going guarantor” your parents agree to assume responsibility for your mortgage in the event that you default on your loan and are unable to make your repayments. Often, the guarantors use their existing property as security for either the entirety of the loan or part of it.
If you do default on your mortgage, your parents will be responsible for paying out the loan in full which could mean their own home is at risk. Limited guarantees can be a good compromise here where part of the loan is guaranteed, mitigating the risk and exposure.
Option 2: Funding the Deposit
Another common way in which parents help children break into the real estate market is by simply giving them the money to use as a deposit. For many first home buyers, they may have the funds and income to make their regular home loan repayments but lack the amount of money in the bank required for a mortgage deposit.
Whether provided as a gift or as a private loan, your parents funding the deposit for you is an option. While there are benefits for first time home buyers in receiving assistance in this way, be aware that some lenders prefer to see consistency in bank accounts and ensure funds in there are maintained for a longer period of time to prove you’re not a financial risk. But policies do vary and the team here at Loan Monster can help connect you with the right solution.
Option 3: Joint Mortgage
There are benefits to property co-ownership depending on the circumstances of each individual, of course.
Parents becoming joint mortgage holders means that the purchased home will belong equally (or proportionally owned according to the terms of the loan) to both you and your parents. Apart from the names on the deed, a joint mortgage arrangement also means that both parties are considered responsible for making the regular monthly repayments.
It’s also important to note that there are actually two different ways in going about a joint mortgage with you parents:
- Joint tenants
Tenants-in-common vs Joint tenants
In a tenants-in-common arrangement – which is more common of the two options – your parents and you will determine the ownership structure of the property when you take out your first home buyer’s mortgage. For example, you might own 60% of the home and your parents may own 40% of the home. If one of the parties owning the house passes away, their share of the property will be passed on according to the specifications of their will. As a child, this may be you but it may be someone else.
Compare this to a joint tenants arrangement. With this home loan structure, both parties own 50% each of the property and in the same event – should one party die – their share automatically goes to the other party regardless of what is specified in one’s will. Ownership of the other 50% share of the home cannot be passed on to anyone else without the consent of the joint tenant.
Co-Ownership Agreements Are Critical
We’re sure you love your parents and we’re positive they return your love in kind. Nevertheless, when it comes to mortgages and finance, a co-ownership agreement is essential. This will ensure the right procedures and set-up is in place if anything should happen down the line, such as a death or default. Putting in place an arrangement from the get-go will save a lot of potential worry, effort and pain down the line.
Other Ways Parents Can Assist
While we’ve listed the common financial ways in which parents can assist a first time home buyer child, there are other ways they can help as well.
- Rent Free Living – Allowing children to live either at home or in another property rent free can be extraordinarily helpful for saving up the funds needed for a deposit.
- Financial Guidance – Responsible financial habits don’t come naturally to many, so having good role models providing financial and mortgage advice is invaluable.
- Increasing Income – Increasing income or finding additional ways of adding income streams to one’s portfolio can be challenging. Parental support and guidance can go a long way to making a positive difference.
Loan Monster: Experts in first home buyers finance Perth
Should your parents gift you a deposit or rather loan you the money to pay back yourself? How can your parents help you navigate the first home buyer’s market in a way that’s financially safe and effective?
There’s a lot to consider when you’re looking to purchase a new property.