Bank of Mum and Dad Strategy

With house prices becoming exceedingly unaffordable in cities like Sydney and Melbourne, it is time to start thinking outside the box to get your foot in the property investment door.

What is the Bank of Mum and Dad?

The ‘Bank of Mum and Dad’ is a colloquial term referring to financial assistance from parents to help their children get a foot in the property market. The Bank of Mum and Dad is noted as one of the top 10 lenders in Australia according to the latest data from APRA. There are multiple ways parents can help their children buy their first property –

• Gifting their children a sum of money to put towards a deposit.
• Loaning their children money with an agreement to be paid back as it suits both parties.
• Buying a property together with a joint mortgage.
• Acting as a Guarantor on a mortgage; or
• Using a portion of the equity in the family home as security for a new loan.

The Benefits

• In Australia, generally gifts are tax-free.
• You will be able to get into the property market sooner than if you were saving up on your own.
• Assistance from Mum and Dad means you can put down a more substantial deposit. This means you can borrow less, possibly foregoing having to pay Lenders Mortgage Insurance and possibly achieving a lower interest rate and reduced mortgage repayments.
• The extra funds mean you might now be able to afford a better property in a better area.
• A bigger deposit can open-up the mortgage market with better deals to choose from.

Considerations

• Some lenders will not accept deposits made from the creation of a loan as it means there might be a third interest in the property, which may reduce mortgage options and borrowing capacity.
• Consideration must be made should any party want to leave the agreement for whatever reason.
• All parties need to take steps to ensure that Mum and Dad do not find themselves struggling financially because of poor investments, loss of income from any party, broken relationships, etc. For example, in an instance where both yourself and your Mum and Dad were liable for the mortgage, having income insurance could ensure that if you lost your job you could still pay your mortgage payments and your Mum and Dad would not have to pick up the financial slack.

The Key Take-Away

The Bank of Mum and Dad is an increasingly popular strategy and may suit you if you are looking to supplement your deposit, get into the market sooner and purchase the best property to suit your investment goals. Assistance from Mum and Dad can come in many forms, each with their pros and cons, but generally, with the right guidance, this could be the strategy to set you up on the path to success.

It would also be prudent for your parents to seek out advice from an appropriate financial planner, taxation advisor and or legal advisor to be satisfied that their help does not affect their financial security.