Navigating the property market as a first-time homebuyer can be a daunting task, especially with the current financial climate.
Interest rates are at a peak, rental costs are creeping higher, and property values are soaring back to record highs.
It’s no wonder that many young Australians are seeking a helping hand from their parents, affectionately known as the Bank of Mum and Dad.
Recent research from Helia, a lenders mortgage insurance provider, indicates that a significant 42 per cent of first home buyers have received financial support from their families to buy a property. The majority of this support (60 per cent) goes towards the all-important deposit. But while parents’ generosity is commendable, it’s not without potential complications.
Understanding the intricacies of gifted deposits, gift letters, and other financial support options is crucial for borrowers and their benefactors.
Let’s delve into what you need to know to make the most of this family-fueled financial boost without falling into common pitfalls.
How lenders view gifted deposits
When applying for a mortgage, lenders meticulously examine an applicant’s savings history, employment status, and any existing debts to ensure they can service the loan.
Even with a substantial deposit from the Bank of Mum and Dad, borrowers must still demonstrate a solid financial standing, including a personal savings record.
Shaun Lordan, the general manager of product lending at Lendi Group, notes that lenders have recently relaxed their requirements for savings.
“It used to be a little bit more arduous where borrowers would need to show an incremental increase in their savings over a three-month period along with the gifted money,” he says.
“But the big thing we’ve seen in the last six months is that lenders have been bringing down the barriers to allow gifting.
“We’ve seen a myriad of lenders move from asking to see genuine savings over a three-month period to only requesting one month’s worth of savings.”
The role of a gift letter
With property deposits often reaching six figures, lenders must verify that the money comes from a legitimate source. Enter the gift letter. This document, signed by the financial benefactor, confirms that the money is a genuine gift, not a loan.
The specifics of a gift letter can vary between lenders. Some allow you to draft your own letter, for which a mortgage broker can provide format advice. Others have their own templates. Some lenders may also require contact information for the donor. The level of detail about the donor also varies depending on the lender’s policy.
Risks associated with gifting a deposit
The risks of giving money for property often don’t become apparent until later, particularly if there’s a breakdown in the relationship between the gift recipient and their partner or spouse.
Brendan Herbert, principal lawyer at Macpherson Kelley, warns that such situations are not uncommon and that gifts can complicate property division in family law disputes.
“Whether the relationship is de facto or a marriage, breakups are a reality of life,” he says.
“In any family law negotiation or dispute, whether it’s in court or not, the property – being the assets and liabilities and the financial resources of the parties that are available for division – will be identified and assessed.
“So at that point, if the monies that have been advanced or the property that’s been acquired with those monies is considered a gift, it would be included in the balance sheet as property that’s available for division between the parties.”
Alternatives: family loans and financial agreements
One alternative is to structure the financial support as a loan, which would be listed as a liability in the event of a separation. However, this could affect the recipient’s mortgage eligibility, so it’s important to weigh the pros and cons.
Another option is a Family Law Act Financial Agreement, which outlines how assets would be divided if a couple separates.
Such an agreement can protect the parents’ contribution by providing for them to be paid out or for the intended recipient to retain the money or property as part of the settlement. For the agreement to be binding, it must be prepared by an experienced family law lawyer.
The Bank of Mum and Dad can be a lifeline for first-time homebuyers, but it’s essential to approach this option with a clear understanding of the implications.
Whether chosing a gift or a loan, proper documentation and legal advice are key to protecting all parties involved.
Have you ever gifted money to a family member? Why not share your thoughts on the subject in the comments section below?
Also read: Where is Australia’s housing market headed in 2024?
Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.
