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With insecure employment and incomes making it harder to earn a comfortable living, and rents and property prices increasingly out of reach, saving a deposit to buy your dream home is almost impossible for a growing number of young people. Enter the ‘bank of mum and dad’ – a method of borrowing money for a deposit from your parents, which can take the form of a loan or cash gift.
Surveys by Digital Finance Analytics show between 30% and 60% of first home buyers call on this form of family lending to achieve home ownership. But not everyone owns up to it socially and relationships can become strained if things go wrong.
‘Family is more important than money, so it’s important to be really careful if you mix the two to buy a property,’ says Adrian Lee, Associate Professor of property and real estate at Deakin’s Faculty of Business and Law.
If you’re coming up short and your folks are willing to enact the bank of mum and dad, how can you go about it in a respectful, grown-up way?
First things first: money dispensed by the bank of mum and dad should be in the form of a gift, which might be set up to be repaid, says Assoc. Prof. Lee – not a formal loan managed by a financial institution. He says keeping the arrangement within your family protects everyone from a nasty falling-out should you run into trouble with repayments.
‘If instead it is transactional and there are consequences of not honouring the contract, it can create rifts in one of the most important family relationships,’ Assoc. Prof. Lee says. ‘Mum and Dad are providing a gift to you, and you will repay them as best as you can on the terms agreed.’
Like any bank loan, full transparency is crucial, and the final loan amount is determined by the lender, Assoc. Prof. Lee says.
‘If you’re going to call on the bank of mum and dad, be up front about your desires of home ownership, why you are coming up short and what you are wanting to buy. This usually requires a face-to-face, heart-to-heart conversation, then leave it up to Mum and Dad as to what assistance they are willing to provide.’
Borrow money from a bank and you’re free to buy a home wherever your budget permits. A loan from your parents may come with many more strings (read: opinions) attached, Assoc. Prof. Lee says.
‘If they’re helping you with your deposit, your parents may expect to be involved in the decision-making process, like where you want to buy – possibly close to their home – and how much you’ll spend. They may also like to attend inspections and help with other aspects like finding a conveyancer.’
Unfortunately, he says, if you’re using this method of lending there’s very little capacity to make a truly autonomous choice. ‘If you want to buy somewhere your parents probably won’t like, you could talk to them – but they may not give you the money,’ Assoc. Prof. Lee says.
‘If you want to make an independent choice, you can finance that choice independently, or you can take the gift with whatever strings might be attached.’
As you’re giving up some independence – and sharing personal information about your finances – to borrow from the bank of mum and dad, Assoc. Prof. Lee says it’s important to be sure home ownership is what you want.
‘Home ownership tends to be medium- to long-term plan of at least five years where your money is basically stuck in the home,’ he says. ‘This means if you prefer to be mobile and, say, find jobs elsewhere, it will make it more difficult.
‘Try not to be peer-pressured into buying a house because everyone wants one. It’s expensive and it will tie you down.’
The same goes for using the bank of mum and dad to help you buy a more expensive home.
‘Using a bigger deposit to buy a bigger home and service a bigger loan can really hurt you,’ Assoc. Prof. Lee. ‘Other than requiring a deposit, owning a home has a lot of upfront costs: 5% to 8% in stamp duty, mortgage and legal fees, which the bank won’t lend you. If you want to sell, there are similar costs.
‘Be sure you’re using the bank of mum and dad for the right reasons.’
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