Australians looking to get into the property market are being warned about how they use the Bank of Mum and Dad. Parents are increasingly giving their kids tens of thousands of dollars to give them enough of a deposit to keep up with soaring property prices.
But it can have big outcomes on a person’s borrowing power if that parental money is a gift or a loan. Axton Finance partner mortgage broker David Pelligra told Yahoo Finance that you need to be clear with the banks about the money you’re receiving.
“If the parents are giving a cash gift, that is always just counted as funds,” he said.
“As soon as we start putting repayment figures on it, you then start having issues with actually having to expense that out as a debt.”
Pelligra said every lender will have a different approach for how they view a loan from the Bank of Mum and Dad.
Some might not even include it at all during their serviceability assessment.
But Aussies going down this path should have a signed agreement between themselves and their parents outlining the terms of the loan.
The lender will then be able to see how much of your income is being dedicated to this loan and what interest rate it’s set at, if any.
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Donlan Lawyers laid out the impact of a loan from the Bank of Mum and Dad on your borrowing power.
It gave the example of a young couple pulling in a combined $250,000 per year, who don’t have any other debts or dependents. Based on that scenario, they could borrow up to $1.3 million.
However, if they had a $200,000 loan from their parents, their borrowing power could slip to just $820,000.
“There is an obvious trade-off,” the Adelaide-based law firm said.
While it might be easier to then just gift the money, there can be issues that pop up down the track.
Mitchell Burger, executive director of Viridian Advisory, said if the young couple break up before that money is used to buy a home, it could be divided amongst each person, even though the parents might have only wanted that money to help their child.
Homebuyers can also be tripped up if the money from their parents vastly outweighs their own savings.
When banks assess how much you can borrow, they will look into how much you get paid, how much you’ve saved, how much you spend, and any liabilities like credit card debt or student loans.
