Implications of using the bank of mum and dad to buy your first home

There’s no denying that buying a property is expensive. For many people, scraping together enough for a deposit can be incredibly difficult without a helping hand from the bank of Mum and Dad.

While you’d think that lending money to family to buy a house would be a no-strings-attached arrangement, that’s not always the case. If you’re lucky enough to receive a bit of cash from your parents to put towards your first home, there are a few important implications that are worth being aware of.  

Let’s dive into the ins and outs of using the bank of Mum and Dad to buy your first home.

‍How to cash out with the bank of Mum and Dad

There are a number of ways your parents can provide a helping hand when it comes to buying your first property. If they’re not in a position to help you financially, you might be able to move back in with your parents. That way you can cut back on living expenses and put these savings towards a home deposit.

Alternatively, your parents might be able to help you out with a cash gift, loan or even go guarantor on your home loan. Here’s how these strategies work.

Cash gift

Your parents might be able to provide you with a cash gift to go towards the deposit of your first home or other upfront costs. When it comes to gifting money, the sum is given without the expectation of being paid back. In some cases, lenders require monetary gifts to be documented, often through a statutory declaration, to clarify that it is a gift and not a loan.

While gifts aren’t typically taxed, it’s important that your parents assess their own financial situation before providing you with a cash gift. The last thing you want is for them to risk losing a roof over their head just to help you get one over yours.

Private loan

If your parents can’t afford to gift you money, they may be able to provide you with a private loan instead. With a loan, you’re expected to repay the money under agreed terms.

If you decide to go down this route, it’s worth drawing up a formal loan agreement that documents repayment terms, interest rates (if any) and consequences of non-repayment. Depending on your parents’ situation, they might charge interest or provide an interest-free loan. Whatever the terms and conditions of your private loan, it’s important they’re all clearly detailed in the loan agreement to avoid any confusion or potential misunderstandings.

Before accepting a private loan from your parents it’s also worth noting that some lenders will view this loan in the same way as a personal loan. Even if they’re not charging you interest on the loan, it’s still considered a liability that needs to be repaid, which could ultimately impact your borrowing power.

Guarantor loan

If your parent’s cash is all tied up in the family home, they might be able to act as guarantor instead. A guarantor loan typically involves your parents using their own property as additional security for your home loan.

If you have only managed to save up a small deposit, having your parents as guarantor can help you avoid lender’s mortgage insurance (LMI) by contributing extra security toward your loan that works out to be the equivalent of a 20% deposit. 

However, just because your parents have agreed to act as guarantor doesn’t mean you can take it easy when it comes to your mortgage repayments. With a guarantor loan, your parent's home is at risk if you default on your home loan. That means they’ll have to cover your loan repayments or risk losing their own home. With this in mind, it’s essential both you and your parents understand the financial and legal implications of a guarantor loan.

You can read more about the different types of guarantor home loans here.

Joint ownership

Your parents might decide to help you out by purchasing the property jointly with you. Under a joint ownership arrangement, the ownership and financial responsibilities are shared according to the agreement.

Joint ownership can get complicated when it comes to tax, capital gains and estate planning. It can often be a good idea to seek professional advice before entering into a joint ownership arrangement with your parents. And don’t forget to have a co-ownership agreement written up before you link up with your parents.

Regardless of whether you get a helping hand from Mum and Dad to buy your first property, most lenders like to see a record of good financial habits and some genuine savings to back it up. So even if you do get a bit of a leg up from your parents, it’s still important to show the bank you’re able to make good choices to service a home loan.

Breakups and the Bank of Mum and Dad

If you’re planning on buying your first home together with your partner, chances are you’re not currently considering what would happen in the event your relationship breaks down. But the fact is that breakups happen, and if you’ve received help from your parents it can complicate things.  

Regardless of whether you’re in a de facto relationship or you’re married, assets and liabilities are typically up for division in the event of a breakup. That is, unless you have a Financial Agreement in place. 

If you’re on the receiving end of help from your parents, you could have a Financial Agreement drawn up that outlines how the assets would be divided in the event of a breakup. It’s important you seek professional legal advice and have the agreement written up by an experienced lawyer.

Loan to family members and tax implications in Australia

Depending on the type of financial help you get from your parents for your first home, there are several financial implications worth knowing about so you can avoid issues with the taxman.

While an interest-free loan doesn’t typically attract tax, the interest charged on a private loan is considered taxable income. This means that your parents will need to declare the interest received as income in their tax return, which will be subject to income tax at their marginal tax rate.

Monetary gifts are generally tax-free, but it’s important they’re clearly documented to avoid any confusion with loans.

Whether you receive a monetary gift or a private loan from your parents, it’s essential to keep accurate records of all loan transactions, including repayment and any communications relating to the money. It can also help to consult with an accountant or financial advisor to make sure you’re complying with all relevant tax laws and to understand any specific implications that relate to your situation.  

If you’re looking for a loan to buy your first home, check out Unloan’s buy a home offering. We can help you get property insights, calculate your borrowing capacity and apply for conditional approval. Plus, we’ve also got stacks of information and resources to help you navigate the home buying journey over at our Learn hub.

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This article is intended to provide general information only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Please consider seeking independent taxation and financial advice before making any decision based on this information.‍

Tax law is complex and subject to change. For the latest information, check the ATO website or with your accountant or financial advisor.‍

‍Unloan is a division of Commonwealth Bank of Australia is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.‍

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