It’s common knowledge that you need funds kept in your savings account over a certain period to prove that you’re responsible enough to handle your finances to qualify for a home loan.
Australian mortgage lenders call them genuine savings. Genuine is the operative word; these cash reserves generally can come only from regular incomes, for windfall gains can’t be the basis of your capability to buy land for sale in Melbourne’s western suburbs or a house in another Victorian city.
Genuine savings typically have to be 5% of the price of the property; it’s challenging to build by design to weed out borrowers with questionable financial acumen.
However, many lenders understand that building up a 5% genuine savings isn’t feasible for many of us. That’s why some financial institutions accept alternatives like borrowed deposits from your family. It’s not an exact equivalent, but it can be acceptable and help you proceed to the next step of the home-buying process.
Is borrowed deposit a viable substitute for genuine savings? Explore the caveats that come with it to determine whether it’s worth pursuing.
A borrowed deposit is a loan granted by the bank of mum and dad. Therefore, it can affect your ability to take out a mortgage and get a favourable interest rate.
If you wish to loan up to 95% of the cost of the property you want, expect to shoulder higher interest in exchange for the greater risk your lender has to absorb for accepting an indebted borrower like you.
But if you’re borrowing 90% of the house’s price only, most lenders may grant you a similar interest rate and fees as borrowers who’ve provided genuine savings. The premium of your Lenders Mortgage Insurance (LMI) will be a bit more expensive.
If you loan no more than 85% of the property’s cost, no lender will care about your borrowed deposit anymore. Expect to be offered a competitive interest rate based on your merit with standard LMI pricing.
Further, your parents could charge you some interest on your borrowed deposit. You could discuss the repayment details, but this liability is going to hurt your finances for a while.
A borrowed deposit requires a legally binding agreement to make the loan official. You can use a solicitor or an online platform to create this document. In other words, you’ll have more paperwork to deal with.
Using a borrowed deposit naturally implicates your parents in the mortgage deal. All of you should seek legal advice to figure out the possible scenarios if you default on your mortgage, your private loan, or both.
Usually, many parents opt to use a second mortgage to secure the loan they issued. In case you could no longer pay for your house, the proceeds from its sale would be used to cover the first mortgage, the second mortgage, and, lastly, your mum and dad’s loan.
A borrowed deposit is worth the consideration if you really must end your renting days before building enough generally acceptable genuine savings. It’s a convenient option but with real dangers. Mull over it long enough to understand and calculate its risk before pulling the trigger on it.