What is a parent assist home loan?
In general terms, a ‘parent assist’ home loan is where a parent or guardian of the purchaser helps to finance the purchase of a property. There is also one home loan product that is called ‘Parent Assist Home Loan’. These types of financial arrangements are different to the parent entering into a guarantor home loan. We’ll explore a range of options, below.
Which lenders offer a parent assist home loan?
There are a range of lenders that offer a loan or finance arrangement that allows parents or guardians to assist their adult children to fund the purchase of a home, by contributing money in some way. Some of these arrangements include:
Bluebay Home Loans
According to non-bank lender Bluebay Home Loans, it is currently the only lender in Australia to offer a loan called a Parent Assist Loan (although similar products exist from other lenders, as we’ll explore). This type of loan allows the borrower’s parents to lend up to 20% of the property purchase price, leaving the borrower to take out a loan with Bluebay for the remaining 80%.
The lender’s website says rather than parents just giving children the money for a deposit, the parent assist loan makes it a formal loan from the ‘bank of mum and dad’, to be managed by Bluebay along with the rest of the loan.
The interest charged on this portion of the loan is half the rate that applies to the rest of the mortgage. Bluebay doesn’t currently advertise the rate for the Parent Assist loan on its website, but be aware that as a general rule, it’s likely you will pay a higher interest rate for the remainder of the mortgage from a specialist lender like Bluebay than you might on a home loan from a traditional lender.
By having their parents lend them their deposit of up to 20% of the total loan amount, a borrower on this type of loan may be able to avoid having to pay potentially thousands of dollars extra in lenders mortgage insurance (LMI), which typically applies if your home loan deposit is less than 20% of the property’s value.
According to Bluebay, borrowers on the parent assist loan can still be eligible for the First Home Owner Grant, depending on the price of the home they buy. Borrowers may find that the interest rates end up being more expensive than a traditional home loan so it may be wise to compare rates, read the terms and conditions carefully and consider seeking professional advice. Consider the Target Market Determination (TMD) before making a purchase decision.
La Trobe Financial
It’s worth noting that while Bluebay’s parent assist loan may be the only product by that name currently available, there may be similar products to it on the market, such as La Trobe Financial’s Parent-2-Child (P2C) first home assistance loan. According to La Trobe, this loan allows parents to decide the amount they wish to lend and the interest rate they wish to set. Like the parent assist loan, it essentially allows parents to lend their child part of the loan amount rather than going guarantor on their home loan. However, borrowers may find that the interest rates end up being more expensive than a traditional home loan so it may be wise to compare rates, read the terms and conditions carefully and consider seeking professional advice. Consider the Target Market Determination (TMD) before making a purchase decision.
Westpac offers a Family Security Guarantee, where parents can choose to stump up cash instead of using home equity to provide a loan guarantee. The funds are invested in a Westpac term deposit to earn interest until the loan balance has been reduced to the point where the guarantee is no longer needed. That’s usually when the loan is worth no more than 80% of the property’s market value.
Unlike the parent assist and P2C products, the parents aren’t lending any money in this case – instead, they are offering up their money as security to reduce the effective loan-to-value ratio (LVR) of their child’s loan. As a result, Westpac says their ability to take out other loans may be reduced and they could lose the money if their child is unable to pay back the home loan. However, borrowers may find that the interest rates end up being more expensive than a traditional home loan so it may be wise to compare rates, read the terms and conditions carefully and consider seeking professional advice. Consider the Target Market Determination (TMD) before making a purchase decision.
The First Home Loan Deposit Scheme participating lenders
The First Home Loan Deposit Scheme is another option you could consider. It lets eligible borrowers chosen to participate in the scheme buy a first home with just a 5% deposit and no lenders mortgage insurance. Bear in mind, however, that participation in this scheme is not guaranteed even if you are eligible, and that borrowing a higher percentage of the property’s value will likely result in you paying more in interest over the life of a loan than if you were able to put down a 20% deposit on the same property. It may be wise to compare rates, read the terms and conditions carefully and consider seeking professional advice. Consider the Target Market Determination (TMD) before making a purchase decision.
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 with a parent assist loan or similar product from another lender, parents contribute cash rather than taking on the risk of using their own home as security for the loan.
In the case of a guarantor home loan, family members – usually parents – typically offer their property as security for your mortgage. This means all or part of your loan is guaranteed. The downside for parents, or whoever acts as guarantor, is that if you fail to meet the loan repayments, they may become liable to cover those repayments, and if they fail to do so they can risk losing their property.
By comparison, the parent assist home loan involves money being lent from parent to child as part of the contract. The loan could be seen as a form of investment for parents, because they can receive monthly income in the form of interest payments from the borrower, with the bonus of helping their child buy their first home. However, this type of loan can also come with some downsides or risks such as a potentially higher interest rate, so borrowers and their parents are advised to seek independent legal and financial advice before entering into such a loan agreement.
Explore further: Guarantor home loans explained
What should I consider before taking out a parent assist home loan?
It’s important to take your personal circumstances into account, as well as the cost and features of any loan product, before signing on the dotted line. You may like to consider seeking professional financial advice. Here are a few extra points to consider when it comes to a parent assist home loan:
For the borrower
- Weigh up how this type of loan could affect your ability to refinance your home loan further down the track.
- Compare other loan options to see if you could save with a lower interest rate or more competitive fees. You can compare home loans for first home buyers with Canstar (select ‘first home buyer’ in the ‘Loan Purpose’ filter).
- Bear in mind, a deposit isn’t the only upfront expense associated with buying a home. You should still plan for other possible costs such as legal fees, stamp duty and moving expenses.
- Be sure you can comfortably afford to lend your child up to 20% of a home deposit.
- Will you still have funds to cope with an emergency?
- Have you factored the risk of this type of investment into your retirement plan?
Can I use equity in my parent’s house as a deposit?
If the parent assist home loan or similar product does not suit, there could be another option to explore. Some lenders will allow parents to act as guarantors for their child’s home loan, using their own home equity as security for part or all of the loan. This may help if you’re a young borrower with a small deposit, plus it could also be a way of avoiding the cost of lenders mortgage insurance. However, the lender will generally still want to see that you earn sufficient income to manage the loan repayments, and that you have a sound credit history. Typically, this type of loan is often restricted to first home buyers.
As mentioned earlier, if something happens where you can no longer keep up the loan repayments, the lenders could turn to your parents to ask them to pay down the loan, and if they’re unable to do so they could potentially lose their home. This makes guarantor home loans a strategy for everyone to consider carefully before committing.
Cover image source: VGstockstudio/Shutterstock.com
Sub edited by Milan Cuk.