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How Far Can The Bank Of Mum And Dad Stretch To Help First Home Buyers? - June 2023

June 16, 2023 / Written by Sarah Megginson

 

By Guest Blogger, Sarah Megginson

Money expert & media spokesperson | Head of Editorial, Finder

With property prices rising so rapidly over the past decade, and interest rates now at their highest level in over 11 years, first homebuyers are struggling more than ever to get into the property market.

The Bank of Mum and Dad is frequently quoted as offering a major source of funds to help young Aussies get a deposit together to buy their first home. According to Finder's Parenting Report 2023, which surveyed 1,033 Australian parents of children under 12, parents are planning to give their children on average $33,278 to put towards a first home deposit.

But is that enough to get into your first home?

Most banks prefer borrowers to save up at least a 20% deposit to buy a home, which is no small feat in the current market. Based on median house prices, this works out to be:

City

Median home price

20% deposit

Brisbane

$714,000

$142,800

Sydney

$1,053,000

$210,600

Melbourne

$756,000

$151,200

Source: CoreLogic’s national Home Value Index, 1 June 2023

These amounts can seem almost insurmountable for first home buyers – many of whom are already paying sky-high rents and are dealing with increased everyday expenses in the current economy.

Even a gift of $33K would hardly put a dent in it. So what can first home buyers do?

Apply for free money – it’s everywhere!

What do we mean by free money? We’re referring to all of the grants, incentives, discounts and waivers available for first home buyers, which can help save you tens of thousands of dollars.

Firstly, depending on where you live, you can access a stamp duty discount, exemption or waiver.

Stamp duty is a tax you pay the state government when you buy a property, and the amount is significant: in NSW, a $750,000 home purchase attracts a stamp duty levy of around $29,000. In Queensland, the same purchase attracts stamp duty of $22,250. And in Victoria, you’d pay $42,000.

As a first home buyer, this is your first saving. For simplicity, let’s average it out at $30,000.

Next, you may be eligible for the First Home Guarantee. This allows you to buy a home with as little as a 5% deposit, without paying lenders mortgage insurance (LMI) – again, a hefty sum.

If you purchase a home for $750,000 and you’re not eligible for the waiver, your LMI premium will be around $40,000.

So far, provided you’re eligible, you can access $70,000 in discounts and waivers.

Better still, the deposit required to buy a home is much, much lower:

City

Median home price

5% deposit

Brisbane

$714,000

$35,700

Sydney

$1,053,000

$52,650

Melbourne

$756,000

$37,800

Source: CoreLogic’s national Home Value Index, 1 June 2023

Suddenly, home ownership is looking much more likely, especially if the Bank of Mum and Dad is willing to tip in tens of thousands of dollars towards your deposit.

But before parents and children start rushing out to open homes, there are a few key considerations that both parties need to ponder before moving forward:

  • Is it a gift or a loan? If it’s a loan, make sure everyone is clear about repayments and expectations from the outset.
  • What are the conditions of helping out financially, if any?
  • What impact will this loan have on the parents’ retirement fund?
  • Is there an option to go guarantor instead and if so, what would that look like?

Before parents' hand over your money – what are the risks?

Of course, we all want to give our kids a helping hand, but the risk for parents who contribute financially to their children's property purchase is that they could do so to their own detriment – hurting their retirement fund and potentially running out of money later in life.

It's really important you look at your overall financial situation before you make any withdrawals from the Bank of Mum and Dad. You should consider whether you are financially secure before helping family members and look for ways to work towards a mutually beneficial outcome.

For example, you might look into offering to act as guarantor on the loan, instead of actually handing over a property deposit. You could offer to buy a property as co-owners: parents as investors, kids as owner-occupiers.

Or, instead of gifting a sum of money, you might pledge to match your kids' home deposit savings dollar-for-dollar. For every dollar they save, you match it. This gets them into the habit and discipline of saving.

To make that money go even further, make sure you stash it away in a high interest savings account; all of the recent RBA increases have made mortgages more expensive, but they’ve also seen savings account interest rates soar. You can earn a return of around 5% on your money, which will help first home buyers reach their savings goal even sooner.

There are a number of ways to move forward so make sure you explore all options. The Bank of Mum and Dad can provide a shortcut towards home ownership for younger Aussies – the key to making it successful is to ensure you land on a plan that works for everyone and doesn’t put financial pressure on those lending a helping hand.

A mortgage and property journalist for 20 years, Sarah Megginson is a personal finance expert and media commentator who heads up the editorial team at comparison site, Finder. She was previously managing editor of Your Investment Property magazine, Australian Broker magazine, and home loan comparison site, Your Mortgage. She's a regular media commentator and appears on TV, radio and in print sharing ways for Australians to make their money work harder for them.

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The Propertybuyer
Podcast

 
Fri 3 May '24
with Rich Harvey
Unpacking the Northern Beaches with Incredible Agents
 
 
Fri 29 Mar '24
with Rich Harvey
How to build a $7 Million Property Portfolio from scratch
 
 
Sat 16 Mar '24
with Rich Harvey
Why Invest in Melbourne?
 
 
Mon 26 Feb '24
with Rich Harvey
Sydney’s Inner West – Hotspots and Outlook for 2024
 
 
Mon 12 Feb '24
with Rich Harvey
Decoding Sydney’s North Shore Market – Outlook and Opportunities.
 
 
Sat 27 Jan '24
with Rich Harvey
Home Buying in the Eastern Suburbs – A personal journey
 

 

Listen to many more
podcasts on our
Podcasts page.