First Home Buyers Borrowing from the Bank of Mum and Dad
First home buyers are finding themselves with extra debt upon purchasing their first home. Once upon a time, it was necessary to have a sizeable deposit when applying for a home loan. Now, those without the deposit can still get their home loan with a little help from their parents. Rather than receiving a lump sum from the folks or an interest-free loan, people are opting for actual loans from their parents. In addition to the mortgage, a second loan is being taken out as a formal agreement between parents and their kids in order to guarantee that it’s repaid. This means first home buyers are getting into debt twice over.
With the average couple taking nearly five years to save their deposit and house prices continually increasing, it’s not easy to enter the property market without a helping hand. One non-bank lender, Bluebay Home Loans, has come up with the Parent Assist loan to keep home buyers accountable for what they borrow from their parents.
How a Parent Assist Loan Works
The idea behind the loan is to allow parents of first home buyers to contribute up to 20% of the property’s purchase price, without having to use their own home as collateral. They also don’t have to be on the home’s title, and they’re not just handing over money. Bluebay say the loan makes it much easier for first home buyers to ask their parents for help.
One benefit for buyers is that they will still be eligible for the First Home Owner Grant and any stamp duty concessions, as their parents aren’t listed as co-owners on the title. The interest rate on the Parent Assist loan is half of the rate of the home loan. At the moment, Bluebay Home Loans are the only lender offering a loan of this type. However it is possible to have a loan from parents drawn up as a formal, binding contract as there are a few risks involved in lending thousands of dollars, even to your own children. Without a legal document holding an individual accountable for what they owe, parents who have lent large may end up completely out of pocket if their son or daughter defaults on their mortgage.
If circumstances do change for any party involved in the parent-to-child lending scenario, a legal contract prevents it from getting out of hand. In the event of death, or a falling out, a simple document will keep everything clear. If, for instance, a man borrows money from his parents and doesn’t live to see it repaid, without an agreement his wife has no legal obligation to repay her in-laws.
It’s extremely important to keep all financial agreements official, even with families. Many first home buyers rely on help – in the form of thousands of dollars – from their parents when they decide it’s time to buy property. It’s not unreasonable to think that most parents aren’t able to give hand outs of that size without at least a verbal agreement that it will come back to them eventually. Financial decisions – investing, buying property, refinancing or anything else – should always be made with the help of a professional, and not entered into via verbal contract.