It’s no secret many first home buyers may rely on the ‘bank of mum and dad’ to get their foot in the door, with a recent survey revealing almost two in three parents are either making or planning to make financial and personal sacrifices to help their children or grandchildren buy a home. Some were even prepared to put off retirement to help their children achieve the great Australian dream of home ownership.
There’s a new loan product that’s being positioned as an alternative to parents going guarantor on your home loan or simply giving you an unofficial loan. It is called a ‘parent assist home loan’. So, what is it, how does it work and what should you consider before taking out this type of loan? Let’s look into it further.
What is a parent assist home loan?
According to non-bank lender Bluebay Home Loans – part of the ABN Group – it is currently the only lender in Australia to offer a parent assist loan. This type of loan allows the borrower’s parents to lend up to 20% of the property purchase price and for the borrower to then take out a loan with Bluebay for the remainder.
The lender’s website says rather than parents just giving children the money for a deposit, this makes it a formal loan from the ‘bank of mum and dad’ to be managed by Bluebay.
The interest charged on this portion of the loan is half the rate charged on the rest of your mortgage.
By having parents lend 20% of the deposit, the borrower may be able to avoid having to pay lenders mortgage insurance (LMI), which typically applies if your home loan deposit is less than 20% of the total value of your mortgage.
According to Bluebay, its parent assist loan is available to its customers who purchase an established property or build with an approved builder. Bluebay says it can advise whether the builder of your choice is approved.
It’s worth noting there may be similar products to Bluebay’s loan in the market, such as La Trobe Financial’s Parent-2-Child (P2C) first home assistance loan. According to La Trobe, this loan allows the parents to decide the amount they wish to lend – up to 105% of the property purchase price – and the interest rate they wish to set.
What’s the difference between a parent assist home loan and a guarantor loan?
The main difference between a parent assist home loan and a guarantor loan is that for a parent assist loan, rather than parents taking on the risk of putting up their own home as security for the loan, they have to contribute cash.
In the case of a guarantor home loan, it allows parents (or someone close to you) to use their property as security for your mortgage. This means part or all of your loan is guaranteed. If you fail to meet the repayments, the guarantor may also be liable to cover those repayments, and if they fail to do so they may risk losing their property.
By comparison, the parent assist home loan is money lent from parent to child as part of the contract. The loan could be perceived as an investment for parents because they would receive monthly income in the form of interest payments from the borrower. According to Bluebay, any extra repayments you make on this portion of the loan on top of your interest obligations will apply first to the parents’ share in the capital growth in the land. Bluebay advises this means you will need to have your property officially valued before you start paying money back to your parents.
In case you decide that a parent assist home loan isn’t for you, the table below displays a snapshot of some of the lowest rate 5-Star Rated variable home loan products on Canstar’s database, with links to providers’ websites. This table is sorted by the current advertised interest rate (lowest to highest), then by provider name (alphabetically). Before committing to a particular home loan product, check upfront with your lender and read the PDS to confirm whether the terms of the loan meet your needs and repayment capacity.
Based on residential standard variable home loans available for a loan amount of $600,000 at 80% LVR, and available for principal and interest repayments. Comparison rate based on loan amount of $150,000. *Read the Comparison Rate Warning.
What should I consider before taking out a parent assist home loan?
It’s important to take your personal circumstances as well as the cost and features of any loan product into account before signing on the dotted line, and Canstar’s Research team recommends a few extra things worth considering when it comes to a parent assist home loan:
- For the borrower: Have you considered how this type of loan could affect your ability to refinance down the track should you wish to change loan or provider? It could be worth investigating this point further in the product disclosure statement (PDS) or other loan documentation, or by talking to the lender directly.
- For the parents: Can you reasonably afford to lend up to 20% of a house deposit, and have you factored the risk of such an investment into your retirement plan?
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