Is it a good idea to borrow off parents for a deposit?
May 31st, 2010
With the rise in house prices it has become more common for people to borrow off their parents in order to get a mortgage for their house.Â While this has some advantages, there are some dangers that should be watched. Deposits are insisted on by most mortgage lenders for two reasons.Â The first is that a deposit gives the lender a cover against default.Â This will mean that if the borrower defaults and they have to sell the house on which the loan is secured, then they will be able to recover the money that they have put up â€“ unless there has been a big loss in the house.
The other reason why banks like deposits is that it allows a person to show that they have the discipline necessary to save the required deposit.Â This discipline will mean that they are more likely to be responsible with paying off a loan.
Having a deposit does tend to mean that a home buyer can get a better deal on their home loan.Â For a start most of the really low interest rates are reserved for borrowers with a low loan to value ratio.Â This means the ratio between the amount of money that the bank lends and the market value of the house.
It is easier to get a home loan with a high income multiple if there is a generous deposit.Â An income multiple is the amount of times the income that the person has goes into the loan that is advanced.Â Thus if there is a loan of $60,000 and there is an income of $20,000 then the income multiple will be 3 (3 x $20,000 = $60,000).Â A deposit can mean that the income multiple will reduce which will either mean that loans will become available or that terms will improve.
Mortgage insurance is another issue with deposits as many home loan lenders will ask for the borrower to get insurance that will cover the lender if the borrower were to stop paying.Â This insurance can cost thousands of dollars over the lifetime of a loan and is usually insisted when the deposit is 20% or less of the value.
It is important to disclose any borrowing that is made if the home loan provider asks for this.Â Most home loan providers will not have any issue with parental borrowing, but it can be an awkward situation if there is an issue and this fact comes out without being previously disclosed.