Gifted Deposit Home Loans
If you’re having a hard time saving for your first home, your family can help you with a cash gift to put towards your deposit
Buying a home is an important goal for many Australians, and parents can be keen to lend a hand to help their adult children buy a first home.
Two common ways that parents or other family members help out older children is by giving them cash for a deposit or acting as a guarantor for their loan. We’ll compare these two options to see how helpful they could be for you.
What is a gifted deposit?
This sort of financial support has been dubbed ‘The Bank of Mum and Dad’, but unlike any other bank, the money doesn’t always come with any strings attached.
However, a gifted deposit home loan may not be as simple as going up to a lender with your parent’s cash. Lenders are likely to ask for evidence of where the money has come from — after all, it could be the result of a credit card withdrawal. Some lenders will request a ‘gift letter’, which states that the funds have been handed over unconditionally and without expectation of repayment.
Even with a gifted deposit, lenders still like to see that you have the discipline to keep up with home loan repayments. To satisfy this you may be asked for evidence of genuine savings, including your past rental history.
What about having a guarantor instead?
Not every family will have the funds available to contribute to a first home deposit. That’s okay — you can still muster the support of family members in other ways.
If your parents own their home, they may be able to act as guarantor for your loan. This is when your mum and dad use the equity of their home as security for your loan. If that doesn’t make sense to you, we have a handy guide which explains guarantors. Your choice of guarantor isn’t always limited to your parents — some lenders will allow other immediate family members to take their place instead.
Having a guarantor can be a handy strategy if you don’t have a big deposit, but you can prove your ability to manage regular loan repayments. Having a guarantor can also help you avoid paying Lenders Mortgage Insurance — potentially saving you thousands of dollars in upfront costs.
Is a gift deposit better than a guarantor?
Gift deposits home loans and asking a relative to be a guarantor both have their pros and cons. Choosing which is the right for your situation is up to you and your family.
A significant benefit of a gift deposit is the limited responsibility it puts on your family. If they’re happy to contribute towards your first home, they only need to commit to never expecting anything back for it.
Agreeing to be your guarantor involves something entirely different.
If you can’t keep up the repayments on your home loan, the lender will likely turn to your guarantor to make good with the loan repayments. . This makes it important for your guarantor to carefully weigh up what they’re taking on and decide if it’s worth the risk.
If your parents want to give you a cash gift for a home loan deposit but you aren’t sure how it will affect your application, making an appointment with your local Aussie Broker might help you understand your options.