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Should you be applying to the Bank of Mum and Dad?

Most first home buyers won’t even consider asking their parents for help to obtain a home loan. But a little help to get you that 20% deposit could have big pay-offs in the long run…

A 20 percent deposit on a house can seem like an impossible dream for many aspiring homeowners. But despite that, most are reluctant to reach out to their parents or guardians for help.

Around 60 percent of Australians would not consider asking their parents to go guarantor on their home loan, according to Mortgage Choice’s 2016 First Home Buyer survey. Victorians were found to be the least likely to ask, at 65 percent.

It’s highly likely that a lot of this reluctance comes down to personal pride. First home buyers might feel the need to prove they can take responsibility for their own home loan without burdening their parents.

But it seems more Australian first home buyers are getting help from their parents with the house deposit, rather than having them act as guarantor.

Generally, it only takes a five percent deposit to secure a home loan, which is achievable for many people. But is it worth putting pride on the line and applying to the ‘Bank of Mum and Dad’ to help get you to 20 percent?

Why a 20 percent deposit might be worth getting help with

Here are three reasons a 20 percent deposit can save you in the long run:

1. Lower Interest Rates

At the time of writing, CANSTAR’s database shows that the average standard variable home loan rate for buyers with a loan to value ratio (LVR) of 80% is 4.45%, whereas the equivalent average rate for more cash-poor purchasers (95% LVR) is 4.70%. Over the typical life of a home loan (25 years, with monthly repayments) that difference can equate to around $15,000 extra in interest costs.

LVR of 95% LVR of 80%
Average interest rate available 4.70% 4.45%
Total cost for loan of $350,000 $595,608 $580,648
Difference

$14,960

Source: CANSTAR. Interest Rates are as at 16th of October 2017. Based on standard variable loans and $350,000 loan amount over 25 years. 

2. Avoid Lenders Mortgage Insurance

As well as a better average interest rate, a Mum&Dad cash injection that gets borrowers under the 80% loan to value ratio can avoid Lender’s Mortgage Insurance, which represents a large upfront saving. First-time buyers with a 95% loan to value ratio looking at a property valued at, say, $370,000 can expect to spend around $11,600 on Lenders’ Mortgage Insurance, increasing to around $24,000 for those paying $570,000. Ouch!

Property value $370,000 $420,000 $470,000 $520,000 $570,000
Loan size $351,500 $399,000 $446,500 $494,000 $541,500
LMI cost $11,635 $13,207 $14,779 $16,351 $24,097

Source: Genworth Lenders Mortgage Insurance Premium Estimator. Based on LVR of 95% on loan up to 30 years. Premiums paying including GST and excluding stamp duty.

3. Less Interest Payable

This is an obvious one. The higher your deposit on a property, the less you need to borrow to purchase it, so you’ll have less interest payable over the life of the debt.

Assuming both hypothetical loan amounts have the same the average standard variable rate of 4.45%, see how interest payable with a 20 percent deposit on a $400,000 property would compare to a five percent deposit:

Interest payable on home loan for a $400,000 property
20% deposit (80% LVR) 5% deposit (95%LVR)
Amount borrowed $320,000 $380,000
Interest payable (4.45%) $210,878 $250,418
Difference $39,540

Based on average standard variable rate on CANSTAR’s database as at 16th October 2017 and loan period of 25 years. 

So you could save almost $40,000 in interest costs by borrowing $60,000 less, in this example.

What to do if Mum and Dad won’t help…

It’s unfair to expect your parents to “shell out for you” (as our Prime Minister once suggested). They’re probably worried about affording retirement, among other things.

But you shouldn’t feel ashamed for at least asking for help.

 

If your parents or other people you’ve asked are unable or unwilling to help boost your deposit, don’t be too dismayed. You could try asking them to act as a guarantor (to potentially save you from having to pay LMI) or you could apply for a First Home Buyer Grant. If you’ve got the patience and discipline, you could employ some hard yard savings methods to get there sooner. However it’s done, getting yourself under that 80% LVR makes great financial sense.

Read more about what can count towards a deposit and some more tips for aspiring first home buyers here. Also, check out our home loan borrowing power calculator.

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