Parents paying your home loan deposit? This is the one risk you must know before applying

Parents never want to see their children struggle, whether they’re 8 years old or 28 years old and struggling to get a foot on the property ladder. 

If you are lucky enough that your parents can financially assist you in purchasing your first property, it’s worth being aware that you cannot just simply apply for a mortgage and assume you’ll get approval. 

In fact, there are still requirements around your savings and financial health that you’ll want to be aware of before you consider applying for a mortgage. 

What is a gifted deposit?

When your parents give you the initial deposit amount required to buy a house, this is known as a gifted deposit. This is different to having your parents come on the loan as a guarantor, as the money for the deposit is provided upfront, as opposed to having an asset, like your parent’s property, used as collateral on the loan. 

Your lender may ask you to provide evidence proving this is a gift, and that there’s no expectation that you’ll need to urgently return the money in the future. Depending on the lender, your parents may also need to provide a document that you can submit to the bank to prove that the amount is a gift and not a loan that could impact your debt-to-income ratio. 

What are the risks of having a gifted deposit?

Having parents who are able to help you with a home deposit is an incredibly lucky and helpful scenario. However, if you have not prepared your finances before applying for a mortgage, there is a risk that a lender will assess your income and bank statements and determine that you cannot afford the home loan without the financial help of your parents. 

Being given a deposit may not disqualify you from getting a home loan, however, it is worth keeping in mind that lenders do look for evidence of genuine savings when you apply for a mortgage. 

Genuine savings is a term lenders use to describe money you have saved up gradually over time, as opposed to, say, a work bonus, a tax refund or inheritance. In fact, a lump sum payment made from family right before you apply for the loan may not qualify as genuine savings. 

Most lenders will accept all or some of the following as genuine savings:

• Savings held or accumulated in your bank account for a minimum of three months;
• Term deposits held for three months or more;
• Gift money held in your account for more than three months; and/or
• Shares or managed funds you have held for more than three months.

Again, receiving a deposit from your parents may not result in a loan application rejection, but it is worthwhile showing evidence of genuine savings in your application to boost your chances of approval. 

Take stock of your budget and try to allocate funds into your savings account for at least three months before you apply. Being able to save regularly showcases strong financial stability and helps lenders to see that you will be able to pay your mortgage on time.

How much do you need to save to be eligible for a mortgage?

Whether you saved up for a deposit yourself, or you were given some or all of your deposit, a lender will still require you to pay for at least 5-10% of the property upfront. Having a 5-10% deposit is typically the absolute minimum a lender will accept from a first home buyer before you expose yourself to risk of borrowing more than you can afford, and facing mortgage stress or even default.  

If possible, it is recommended that would-be buyers aim for a deposit of at least 20% so that you can avoid paying costly Lenders Mortgage Insurance (LMI). This insurance is paid by the borrower to the lender when your deposit is below 20%, and can climb into the tens of thousands of dollars range depending on the value of the property.   

Getting a foot on the property ladder is important and applying for 5% or 10% deposit home loans may help you to do so faster. However, the smaller your deposit, the greater your debt. And the larger your mortgage repayments and interest charges will be.  

While you may be able to borrow up to 90-95% of the value of the property without having any significant savings, you will still need to show that you have the income to repay your monthly mortgage instalments.

If you’re not sure how to proceed, or you would like more personalised advice, it could be worthwhile consulting a mortgage broker. A mortgage broker may be able to help you boost your application and assist you in finding a competitive mortgage for your financial situation.

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