While it is difficult to find the money for cash deposits, it’s no surprise that adolescents lean to the Bank of Mum and Dad for their property purchases. Purchasing a home is one of the most significant financial commitments a person can make in their lifetime. In addition, property law can also be taken into account when dealing with purchasing properties – and it’s not cheap
The Bank of Mum and Dad refers to parental funding. This means it is frequently used to help with the purchase of a home or property. The most common ways for parents to assist are to act as guarantors on a home loan or to provide a cash gift. Parents sometimes have the expectation that they will be repaid.
A guarantor home loan allows a close relative (usually a parent) to use the equity in their home as security for part or all of the buyer’s deposit. After doing so, they promise to be responsible for the home loan’s repayments if the borrower falls behind on payments.
As a result, many people are turning to their parents, aka the Bank of Mum and Dad, for potentially more affordable financing. In this article, we’ll discuss more information related to the Bank of Mum and Dad.
Bank of Mum And Dad: Statistics
According to the Australian Bureau of Statistics’ (ABS) latest Residential Property Prices index, the average Australian home now sells for $835,700. Despite the low-interest environment and various assistance programs, rising property prices mean that would-be homeowners may have to incur significant debt or risk being priced out of the market.
First-time buyers face significant challenges when purchasing a home; the average house price continues to rise, as do the costs of living and renting. Saving a large enough deposit these days appears to be impossible. According to Legal & General’s research published in October 2020:
- 49 percent of first-time buyers under the age of 35 received assistance from the Bank of Mum and Dad to purchase a home.
- 65 percent of first-time buyers said they would not have been able to buy without the assistance and would have had to postpone their purchase for five years. In 2020, the Bank of Mum and Dad was lending an average of £20,000 per loan.
What Digital Finance Analytics Found
According to research firm Digital Finance Analytics (DFA), the Bank of Mum and Dad recently became Australia’s ninth largest mortgage lender. More research showed that a shocking 60 percent of first-time buyers receive financial assistance from their parents, with parental contributions averaging $92,000 in April 2021 – enough for a 20% deposit in most parts of Australia.
However, it is not only those who are under 35 who require financial assistance from the Bank of Mum and Dad. In 2020, financial assistance for home purchases by those over the age of 35 will account for £2.14 billion, or 61 percent of total lending by the Bank of Mum and Dad.
While this high figure is likely due in part to older first-time buyers looking for larger, more expensive properties as a home for their growing families, Bank of Mum and Dad will still be behind 101,800 transactions among the over-35s.
Even 9 percent of people over the age of 55 who were planning to buy said they would have had to postpone their purchase if the Bank of Mum and Dad had not provided financial assistance.
Gifting Or Lending Money To Children
The majority of parents give their children cash as a gift to make up the difference in their deposit and increase their borrowing power. This is so they can get a better mortgage deal and/or borrow more. Most banks will accept a gifted (or partially gifted) deposit. They may still require written confirmation from parents that it is a genuine gift. This is due to two factors:
- In order to calculate affordability, they need to know that the money isn’t a loan that must be repaid on a regular basis.
- Banks would want to know that if the worst happens and they have to repossess the house, the parents have no interest in it.
It’s also possible that parents cannot or don’t want to give their children money to help them buy a house. Another option is to lend the money to them. A loan agreement is relatively simple to prepare.
This should include any interest paid on the loan as well as when it must be repaid. For example, when the property is sold. A parent should also include what happens to the money if any of the people involved in the loan dies or if the parents require the money back.
If a loan is involved in the purchase, it must be declared to a mortgage lender. This could have serious consequences for a mortgage. A loan may have an impact on mortgage affordability calculations because lenders will factor loan repayments into the child’s expenses.
Some banks will not accept a borrowed deposit because the money comes with conditions. It will limit the number of deals that a child can apply for.
Pros And Cons Of The Bank Of Mum And Dad
Pros
Tax-free Gift – The money will be tax-free if the parents live for seven years after the gift. It also assists parents in reducing the size of their estate. This results in a lower future inheritance tax bill.
Lower Monthly Repayments
The Bank of Mum and Dad can assist people in making a larger down payment on their first home. This allows them to borrow less and possibly obtain a lower interest rate, resulting in lower monthly payments.
A Better Home
The Bank of Mum and Dad could help children buy a better property by contributing to the deposit. Whether it is a slightly larger home or a better location, your child may not need to move again in a couple of years. This could save them thousands of dollars on the cost of buying and selling real estate.
Better Mortgage Choices – A larger down payment can open up the mortgage market, giving you more options.
Cons
Reduced Mortgage Options For Loaning – Loans from Mum and Dad’s bank can have an impact on parents’ mortgages. Some lenders will not accept lent deposits because they indicate that someone else has an interest in the property.
Required Additional Information – Proof of funds can be requested by mortgage lenders, estate agents, and solicitors. Parents may be required to provide proof of where the money they are gifting came from. This may entail presenting numerous bank statements as well as certified identification.
Relationship Breakdowns – Nowadays, most people purchase a home with the help of a friend or partner. If that relationship ends in divorce or separation, a parent might find their child’s ex waltzing away with half of their money. If the Bank Of Mum and Dad lends to one child, it can cause friction with their siblings. This can forever strain relationships.
Smaller Savings – Giving money to your children may leave a parent in debt in the future. Assessing one’s finances and getting legal advice can help in getting more savings.
Importance Of Seeking Legal Advice
As stated, the bank of mum and dad still has it cons. Families, without a doubt, have unique experiences and situations. This results in different outcomes when they plan to purchase a home with the Bank of Mum and Dad. That’s why it’s important to stay clear of financial struggles by seeking legal advice.
Our conveyancing experts from JB Solicitors are here to assist you in arranging needed documents. We also aid in drafting up deeds to ensure the protection of your home and property needs. In addition, we provide fixed-fee pricing to provide our clients with a clear sense of cost for their financial budget.
Reach out today for your property and conveyancing needs.
