Calling Bank of Mum & Dad!
One of the most common sources of equity/deposit when it comes to buying a home is in fact your parents (or anyone who is willing to help you out).
If you’re fortunate enough to have parents who are willing and able to provide you with extra cash towards the deposit, it can be huge advantage when it comes to buying a home.
Firstly, you might be short on the minimum deposit threshold required to get it done on your own. So even a small amount could be the difference between a successful application (and therefore purchase of property) or not.
Secondly, it could make a big difference on your pricing. When your total deposit is <20% banks will charge what’s called a Low Equity Premium which increases your total interest cost. But if a gift from parents increased your total deposit to 20% or more of the purchase price, you would avoid that Low Equity Premium. On a $1m home loan, this could save you up to $7,500 per year in interest costs.
Any gifted funds need to be supported with a gift letter which includes these three main fundamentals:
- The gift is non-repayable (at least until the property is sold)
- The gift is non-interest bearing (so that it’s not classified as a debt)
- The giftor will not lodge any encumbrance on property title of the property
These three fundamentals allow the bank to classify the gift as equity rather than a loan for the application.
If you do you have an agreement with the giftor to pay the funds back one day, you may be able to borrow the funds back from the bank at a future date if you have the borrowing capacity to do so (if Loan to Value Ratio and affordability allow). This may not happen for many years and there’s no guarantee of getting approved for it so it’s not 100% certain but many customers of mine have done this before.
So come on Mum & Dad, help us out here!