Understanding gifted home loan deposits vs. guarantors

The high price of Australian properties, especially in major cities such as Sydney and Melbourne, can make owning your first home seem far out of reach. So it is understandable that many first home buyers look to their parents to get a foot in the bustling property market door.

If your family is in the financial situation where they can help, take the time to consider the type of help that will work best - either a gifted home loan deposit or guarantor loan.
Let’s run through both options in more detail.

Gifted home loan deposit

Pro

• Unlike a guarantor loan, parents don’t need to put their own home up as security.
• If the gift amounts to 20% of the purchase price no lenders mortgage insurance is charged.

Con

• Families need to have the money available to gift.
• The money is a gift, which means the child is not obligated to repay the amount.

For parents who have the money available, an option which keeps the family home out of the equation, is gifting the upfront deposit. A “gift letter” will need to be signed by mum and dad, which clearly states that the money is a gift and is not expected to be repaid.

As a first home buyer you will still need to show that you have good savings habits, so it’s important not to just rely on your family gifting the 20% deposit to get you across the line to home loan pre approval. You will need to show that you have good savings habits, as the lender will ask for 3 months’ worth of bank statements.

Going guarantor on a home loan

Pro

• Parents do not need to provide cash upfront.
• If 20% of the purchase price is guaranteed no lenders mortgage insurance is charged.

Con

• The family home is put up as security for the loan.
• Parents are liable if their child gets behind on repayments.

An alternative option for families who don’t have the cash upfront is to use the equity in their home to go guarantor on their child’s first home purchase. The biggest risk for parents or other family members who decide to go guarantor is they are telling the lender that they will step in if their child is unable to meet repayments (on the portion of the loan they have secured).

Just like a gifted home loan deposit, as a first home buyer you will need to show that you have a savings history and can meet the loan repayments. If you’re a parent, before becoming a guarantor on your child’s loan, it is important to get independent advice from a financial advisor, so you fully understand the implications of providing your house as security.

While no child will want to see their parents forced to sell their family home (as a worst case scenario), unforeseeable events like a loss of income could end up putting parents, who have gone guarantor at risk.

The bottom line

In Australia, more and more families are helping their children buy their first home. To ensure it is a smooth experience for both parents and children it’s important to know exactly what you’re signing up for. Do your research and seek legal advice, that way you can be rest assured you’re making the right decision for you and your family.