Navigating the path to purchasing your first home is often a complex and daunting journey, fraught with financial hurdles and the challenge of amassing a sufficient deposit. In this crucial fifth installment of our 30 Tips for First Home Buyers series, we shine a spotlight on the pivotal role that family assistance can play in turning the dream of homeownership into a reality for many. Whether it’s through generous gifts or loans from family members, the provision of free board to save on living expenses, receipt of an inheritance, or the strategic use of a family guarantee, the support from the “Bank of Mum & Dad” has emerged as a key player in the property market. This chapter delves into the intricacies of these common forms of family aid, offering invaluable advice on how to approach, structure, and benefit from them. As we explore these options, we aim to provide first home buyers with practical solutions to overcome the barrier of insufficient savings and step confidently onto the property ladder. Join us as we guide you through the essential considerations and benefits of family assistance, empowering you to make informed decisions in your journey to homeownership.
Let’s take a look at the more common modes of assistance that you might wish to consider with family.
Tip 20: Family Assistance – Buying Without Enough Savings: Gifts/Loans from Family
A cure for a lack of savings/deposit is to get a gift of money from the family. This could also take the form of a loan (depending on the terms and the overall scenario). The attraction of this option is that it can be a simple and quick solution shortening what otherwise would be months or years of saving to be in a position to buy a property.
Obviously the ability of a family to assist in this way will depend on their financial position and how many siblings may expect similar assistance.Â
If this kind of support is being offered then it is important that you are very clear as to what the terms of the arrangement are. Is it a straight out gift or a loan? If the latter, what are the repayment arrangements? I would encourage you to document the agreement so that it is clear for all in case people’s recollections vary later.
One other consideration, if you are buying a property with a partner and one of you is getting a gift from parents, it is important that everyone is clear about who the gift is intended to benefit and what the expectation is in relation to the money gifted if the relationship was to end.Â
The larger the size of the gift the more this may matter. It can lead to some hard discussions but they are far easier to navigate at this stage than later on after a relationship has ended.
A specialist Family Lawyer can help you understand the issues and possible solutions. We know a large number of great family lawyers so will be happy to refer you to one.
A variation on a gift of cash, is being able to live with parents rent free while you accelerate your savings. This often works best if seen as a 6-12 month step and there is a strong relationship between parents and children with clear boundaries and respect for the support that the parents are providing (especially if the “kids” are moving home after living out of home for a number of years).
Tip 21: Family Assistance – Buying Without Enough Savings: Family Guarantee
Another way family can help first home buyers get into the market sooner is by way of a Family Guarantee.
A guarantee from a family member can reduce or remove the need for genuine savings or to have their own money to put towards a purchase.
This is how it works… A guarantor effectively allows the equity in their property to be used as additional security for the borrower’s loan. This can allow the borrower to borrow 100% of the purchase price plus all the on-costs (stamp duty, government fees). So this strategy removes the need for either the borrower or their family to use their savings or liquidate any assets.
It is important to understand that the borrower must still be able to demonstrate that they can service the loan sought. The guarantor’s income is not being used to help the borrower obtain a higher loan. The guarantor(s) are simply putting up a property as a second security for the loan.
The value in doing this includes:
- A First Home Buyer is able to buy a home with little or no savings which means they can buy a home years earlier than they would otherwise be able,
- Family can help a First Home Buyer without the need to have liquid assets/cash available
- A First Home Buyer can avoid the need for Lenders Mortgage Insurance (LMI) and the cost associated with that,
- Interest rates on lending are generally lower and lending policies are more flexible/generous compared to loans in LMI territory,
- An increased borrowing capacity (as a rule) for the First Home Buyer due to the combined effect of all of the above
These loans are not available from all lenders and the policies and structure vary from lender to lender. The lenders we lean towards limit the guarantee to the amount of lending that is above 80% of the value of the property being purchased. So the guarantee is for only a small portion of the total loan.
The guarantee can be released as the size of the mortgage decreases and the value of the purchased property grows. If at the point this is done the lending is under 80% of the property value then this is a simple and cheap process. If the lending is still above 80% of the property value then LMI will be payable based on the numbers at that time.
Alongside the benefits of a family guarantee there are risks that both the first home buyer and their families need to be aware of.
The major risk with a guarantor loan lies in the potential that the borrower defaults and that could put the parents property at risk and it may need to be sold to cover the debt. Clearly this is dramatic and serious, more so if the parents property used as security is their home. So it is important to consider this option carefully before proceeding with it and is only recommended where the relationship between the family and First Home Buyer is strong and good communication exists.
We hope you enjoyed our tips on family assistance for first home buyers. For more useful tips for first-time buyers, check out part one of our 30 tips For First Home Buyers here, part two here, part three here, part four here, and our First Home Buyer page in the knowledge centre here.
