Plenty of parents want to help their kids into a first home. That help usually comes as a gift, a loan or a guarantee, and each one looks different to a lender. The mistakes I see most often are cash gifts that affect a parent's pension, guarantees that put two homes at risk, and family loans with nothing in writing.

Do you need family help if you're using the 5% Deposit Scheme?

Sometimes not. The Australian Government 5% Deposit Scheme lets eligible first home buyers purchase with a smaller deposit. Three rules shape how family help fits with it:

  • The price cap. In Sydney and NSW regional centres the cap is $1.5 million ($800,000 elsewhere in NSW). Both the purchase price and the lender's valuation have to be at or under the cap. Caps can change, so check the current cap for your postcode rather than assuming, especially on the Central Coast.
  • The 20%-plus trap. The scheme is for deposits of at least 5% and under 20%. If a generous gift takes you to 20% or more after costs, you're no longer eligible. The rules also say buyers can't move cash or assets to someone else to fit the criteria.
  • Two borrowers, both first home buyers. A joint application is capped at two borrowers, and both have to meet the first home buyer test (or not have owned property in the past 10 years). That's why a parent usually can't just go on the loan.

Scheme rules can change, so check the current eligibility criteria before you plan around them.

Whether a gift can count towards the 5% under the scheme also depends on the lender.

Family help can still cover stamp duty and costs, add a buffer, or help above the cap, where the scheme isn't available. I've also covered high income with a small deposit, buying with a tiny deposit and what Help to Buy is.

How do banks treat a gifted deposit?

A gift is usually the cleanest kind of help in a lender's eyes, as long as it really is a gift. Here's the real trade-off: it's clean for the bank and permanent for your parents.

If the money is a gift, the lender will usually ask for a signed gift letter or statutory declaration from your parents saying it doesn't have to be repaid, plus evidence the money has reached your account. It has to be true. If your parents expect it back, it's a loan, and the bank needs to know.

Many lenders want to see some of the deposit saved by you over time, especially if you're borrowing more than 80% of the property's value. Some will accept a gift in place of genuine savings and some won't. It depends on the lender.

Some families sign a gift letter while privately seeing the money as a loan. Misleading a lender is serious, and it's not something I'll help with.

Also worth weighing: unless it's documented otherwise, a gift can be exposed if you later separate, and Centrelink limits apply if your parents are on or near the Age Pension.

How does a family guarantee work, and how do you get released from it?

With a family guarantee, your parents offer equity in their property as extra security, usually for part of your loan. You still make all the repayments. Your parents are only called on if you can't pay.

The guarantee usually covers only the top slice of the loan, often as a separate split. Under the Banking Code of Practice, banks that subscribe to the Code must limit a guarantee (to a set amount or the value of the security). They generally can't accept it until day 3 unless the guarantor has had legal advice. ASIC's Moneysmart suggests guarantors ask exactly how much is guaranteed, when it reduces and when it ends.

Once your loan is around 80% of the property's value, through repayments, price growth or both, you can apply to have the guarantee removed. It usually needs a new valuation and the lender's approval, so it isn't automatic, and it can take longer if prices fall.

The risks for parents are real, and I've set them out in Guarantor loan risks.

What's the difference between a family loan and a gift?

Generally, money from a parent to a child is presumed to be a gift (the "presumption of advancement"). The burden is on parents to show it was a loan, which is one more reason to put it in writing.

If you have a partner, now or later, a formally documented loan on commercial terms, with interest, may help keep the money out of a property settlement. A family lawyer can tell you whether that applies to you.

Here's the real trade-off. A repayable loan is a debt, and the lender will count it, which reduces how much you can borrow. Lenders need the truth, so you generally can't call it a gift for the bank and a loan for the family. Other options, such as a binding financial agreement, are a conversation for a family lawyer.

Can parents buy with you, or use their own equity instead?

Buying together. A parent on the loan as a co-borrower usually rules out the 5% scheme, because of the two-borrower first home buyer rule. On stamp duty, Revenue NSW lets a non-spouse "equity partner", such as a parent, own up to 50%. The buyer gets the concession on their share and the parent pays duty on theirs (the full concession if the parent holds 5% or less). Concession rules can change, so check the current Revenue NSW guidance. Capital gains tax for the parent, land tax and whose income counts are questions for an accountant.

Parents using their own equity. Some parents borrow against their own home and gift or lend the cash. Your loan stays free of a guarantee, but your parents carry the debt and have to qualify for it, so their age and exit plan matter. The tax side is for their accountant.

How does helping out affect parents on the Age Pension?

Services Australia allows gifts of up to $10,000 in a financial year and $30,000 over five financial years, and the limits are the same for singles and couples. Anything above that counts as an asset and is deemed for five years. These limits can change, so check the current rules. A genuine loan isn't a gift: it's a financial asset and is deemed, even if no interest is charged. If your parents are thinking about forgiving a family loan later, they should speak to Services Australia first. It's worth checking with Services Australia or a financial information service before handing over any money.

What should a family credit policy include?

It helps to agree a simple family credit policy, in writing:

  • How much your parents can afford to lose if things don't go to plan
  • Whether it's a gift or a loan, in writing, and that the bank is told the same thing
  • If it's a loan, the interest, repayments and when it's due
  • If it's a guarantee, the exact amount guaranteed, when it reduces and when it ends
  • What happens on separation, on sale of the property, or on a death in the family
  • Independent legal advice, for the parents and the buyer separately
  • A Centrelink check if your parents are on or near the Age Pension

Where does a mortgage broker fit, and when do you need a lawyer or accountant?

Lender policies on gifts, genuine savings and guarantees vary. That's where I come in: whether the 5% scheme fits, how a gift, loan or guarantee changes what a lender will do, and how a guarantee could be limited and later released. I won't tell you which option is right for your family. For family loans, co-ownership, tax and CGT, a family lawyer or accountant is the right person.

Still working out your path? Which door? is a good start, or you can book a 30-minute strategy session with me.

This is general information only and doesn't take into account your objectives, financial situation or needs. Consider whether it's appropriate for you and get independent legal, tax and financial advice before acting. Credit eligibility criteria, fees and charges apply. Tom Carr, Credit Representative 559744, ACL 561324.

Sources