Buying your first home is a big deal, but with prices going through the roof it’s getting harder.
That’s where the Bank of Mum and Dad comes in – parents lending their kids some cash to get into the market and maybe even get out of the family home!
While it’s a nice gesture, it’s not always simple.
Let’s get into the pros and cons of using the Bank of Mum and Dad to buy your first home.
Pros
- Bigger Deposit
The biggest advantage is a bigger deposit which can increase your borrowing power and get you better mortgage deals.
- Avoid Lenders Mortgage Insurance (LMI)
A bigger deposit might help you avoid or reduce LMI costs and save you money over the life of the loan.
- Faster Homeownership
The Bank of Mum and Dad can get you into the market sooner than you could on your own.
Cons
- Complicated Loan Approval
Taking money from parents can make the loan approval process more complicated. Lenders may need proof that the money isn’t repayable. If it is, they may require a loan agreement to see if you can service both loans. Another option is for parents to provide additional security by acting as guarantors, but not all lenders offer this.
- Relationship Strain
Money can ruin relationships, especially if there’s no clear agreement or if circumstances change.
- Financial Risk for Parents
Parents may put their own financial security at risk if they lend more than they can afford or need the funds later.
- Sibling Inequality
Helping one child financially can create disputes or expectations from other siblings for similar support.
- Age Pension Implications
When parents give or lend money, it can affect their age pension entitlements. A genuine loan is an asset for the parents, even if interest-free. If it’s a gift it can impact income and assets tests for 5 years from the date of the gift.
The Bank of Mum and Dad can be a godsend for first-home buyers, but you should be careful. Both parties should get legal and financial advice to protect themselves.
Ultimately, it’s a decision that should be made with your eyes open to the pros and cons.
Based on an article written by Peter Kelly for his publication ‘Realise Your Dreams.”
