It’s not the big 4 anymore, it’s the big 5.

There are four big players in the home loan market, but a new player has emerged: the Bank of Mum and Dad.

Years ago, when Malcolm Turnbull was still Prime Minister, he famously recommended to a radio host that he “shell out” for his children to help them buy a house.

This is now happening more often at house sales and auctions around the country. For example, a Sydney man recently paid $7.1m for rundown Bondi Beach unit for his kids.

According to Jarden economists, the Bank of Mum and Dad has injected more than $2.7 billion into the property market in the past year as around 15% of borrowers tap their parents for financial help. They received, on average $92,000 from their parents for the purchase of homes, Jarden found.

Assuming most are first-time buyers, around 75% got help from family.

This is markedly up from 60% in 2017 and a lowly 12% in 2010.

This is hardly surprising given that Generation Y households make up 15% of the population and own only 5% of the share of the national wealth.

Some economists hypothesize that parents helping their children get their first house is why property prices held up so much after the post pandemic slump and continued RBA rises. It created a pool of buyers who were not as rate sensitive.

All parents want to help their kids if they have the capacity and there are 3 ways they can help purchase property.  

1. Gift of Cash

The simplest way to help out is a gift. This can be any amount, however lenders often distinguish between gifts and genuine savings and this will impact the kids capacity to service and borrow.

Genuine savings is a term given to money and deposits that have been in an account usually for more than 3 months.

A large recent deposit is a gift if it has been transferred from another account less than 3 months ago.

For a gift to be used toward a purchase of property lenders will require a declaration from the parties that it is a gift and doesn’t require to be paid back.

A lender will still want to see at least 5% genuine savings to demonstrate that the borrower has the capacity to save money and good financial behaviour.

Furthermore, no matter how large the gift, whatever the remaining amount required to complete the purchase, the borrowers must still be able to pass the servicing test.  i.e. they must be able to afford the remainder of the loan.

2. Parents as Guarantors

High property prices are seeing some first home buyers turn to parents and close relatives to act as a guarantor for their loan.

This is useful when first home buyers can demonstrate they have the capacity to service a loan but have not been able to save enough of a deposit. Or, they may have a deposit saved, but not be able to buy in the area they want, or buy a larger property.

It can help first home buyers get into their house faster, but it comes with some risks.

The new home will be the primary security. However, the parent’s home will be used as additional security for the kid’s loan. This means the lender will also take out a mortgage over the parents’ property.

This mortgage will not support the loan directly but will be used as a guarantee.

The amount of the guarantee will depend on the lender’s policy. The guarantee can vary from the full loan amount to as little as 20% of the loan (where the loan is for 100% of the purchase price).

After the kids have built up equity in their property, the parents can ask to be released from the loan.

Another benefit of having a guarantor is that the borrower may save thousands by avoiding Lenders Mortgage Insurance (LMI). LMI is generally required for home loans where the loan is greater than 80% of the value of the property.

However, the risks are if the kids cannot pay off the loan, then the lender may seek to recover funds from the parents. Most lenders will insist the parents seek independent legal and financial advice before agreeing to the arrangement.

3. Parents as Co-applicants

If the first two options don’t suit, then buying the home as a property share could be an option. This way both the parents and the children have an interest in the property and are all contributing to the repayments.

This could increase the borrowing capacity of the kids, enabling them to get that first home without having to wait years to save the deposit.

It can also serve as an investment for the parents as they could benefit should the kids sell up at some stage.

Property share loans have their own rules and caveats as to minimum amounts co-borrowers split the amounts up, and each must be able to service their portion of the loan.

Some things to keep in mind, however. Before undertaking any financial arrangement, the parents and children should seek financial advice. It may also pay to have written agreements in place to ensure each understand what could happen if someone loses a job, or another party wants to exit the agreement and wish to be paid out for their portion, or the property needs to be sold.

If you are considering helping your kids, or you’re are a first home buyer looking for help, feel free to get in touch to discuss your home buying options.