# Property deposit - 10% or 20%?



## Tyler Durden (7 July 2012)

Really basic question here, but I had a 'financial health check' with a rep from my bank yesterde, and I asked him if I still needed 10% as deposit if I had my parents' property (almost full equity) as security/guarantors.

He said I needed 20% deposit to avoid insurance, and he made it sound like that with 10% I wasn't going to have much hope in getting a loan. He also said having my parents' property as security didn't make any difference.

So I just wanted to know, is he right?? All along I've been trying to save 10% as a deposit, so if it's going to be 20%, then this...well, pretty much doubles the timeframe I had in mind


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## KurwaJegoMac (7 July 2012)

That's rubbish - banks love guarantors with no debt. They then effectively own assets well in excess of the loan amount.

E.g. Say you're buying a house for 300k and your parents are guarantor with their house valued at 400k

Your loan would be 270k (assuming 10% deposit in your example) against assets of 700k. What bank wouldn't want that? Even in this climate!

I would however caution against such a setup. With a 10% deposit that leaves only a very small buffer against house price declines. Should you be unale to repay, or prices drop well below your equity the bank may call in the properties - you don't want to risk your parents losing their home.

I myself bought last year and have seen the value of my property drop around 5% since then. Since i had a 20% deposit i still have a 15% equity buffer. However had i borrowed with a 10% deposit i'd be looking at a 5% buffer - that is awfully tight and we are well within the possibility of further falls 5-10% or more. I'm not saying it will/wont happen but i'm a firm believer that you should always have a suitable buffer. You want to sell on your terms, not when you're desperate to cover a loan.

Just think long and hard before you make a decision - it's natural for parents to do everything to help their children but sometimes you need to reject that assistance so as to not put everything they've worked so hard for to risk. Prices aren't going anywhere just yet, you still have time to work on that deposit.


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## tech/a (7 July 2012)

Just to add a bit.

You'll have to have mortgage insurance---no big deal a grand or so.
What that means is if you default and there is a difference in sale price
Of the property to the amount owed then the insurance is claimed.
Good protection for you and the bank.

Banks look at security and serviceability.
If their valuation is over or at he asking price of your
New house then it will qualify for 90% of he value
With 10% down if not you won't qualify regardless of what your
Parents put up as security.( they would be safer giving you whatever
Shortfall you have --- if you ave one from a line of credit--- they are then only 
Exposed to that amount not their whole house )

Next is serviceability if you can afford the repayments and they normally calculate a 
2% buffer.I personally use 4% as as sure as recession comes so does inflation.

So don't get your parents involved you'll be glad you didn't.
Yes the bank guy is right.
Work the system to benefit yourself.
First step is to understand it and then use it!


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## craft (7 July 2012)

tech/a said:


> Good protection for you and the bank.





Good protection for the bank but *NO* protection for you as the insurance company may be able to seek recourse against you for any default claim they pay to your lender.


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## tech/a (7 July 2012)

craft said:


> Good protection for the bank but *NO* protection for you as the insurance company may be able to seek recourse against you for any default claim they pay to your lender.




If there wa any recourse then you would have paid he bank.
Could save you from bankruptcy.


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## craft (7 July 2012)

tech/a said:


> If there wa any recourse then you would have paid he bank.
> Could save you from bankruptcy.




The rights of recourse against you move from the lender to the insurance company. It provides the borrower *NO* protection. Suggest people research this for themselves before relying on a belief or forum provided opinion that they have any sort of protection.


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## tech/a (7 July 2012)

craft said:


> The rights of recourse against you move from the lender to the insurance company. It provides the borrower *NO* protection. Suggest people research this for themselves before relying on a belief or forum provided opinion that they have any sort of protection.




Ok you have no protection
But the insurance will pick up the difference then sue your **** off in an attempt to recover money's or any guarantors 
Happy property investing


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## Judd (7 July 2012)

As a parent the first rule I stipulated to my children was Do not ask me to be your guarantor as the refusal will offend.

Get a mortgage on your own merits and don't burden them with the possibility, however remote, that they could lose the roof over their heads because of your activities.  My view only and others can do what they like.


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## StumpyPhantom (7 July 2012)

Judd said:


> As a parent the first rule I stipulated to my children was Do not ask me to be your guarantor as the refusal will offend.
> 
> Get a mortgage on your own merits and don't burden them with the possibility, however remote, that they could lose the roof over their heads because of your activities.  My view only and others can do what they like.




I'm hopefully almost a decade away from having to broach that question, so interested in hearing your first rule.

What about coughing up (or helping to make up) the 20% deposit as a documented, but informal, loan?  So that avoids the need for a guarantor and limits the parent's loss to the amount coughed up.

I'm thinking I should help in some way (my parents helped with my first deposit) and home loan affordability is such now that it may never otherwise be reachable.

Grateful any views.


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## Judd (7 July 2012)

StumpyPhantom said:


> I'm hopefully almost a decade away from having to broach that question, so interested in hearing your first rule.
> 
> What about coughing up (or helping to make up) the 20% deposit as a documented, but informal, loan?  So that avoids the need for a guarantor and limits the parent's loss to the amount coughed up.
> 
> ...




We didn't assist with the deposit.  What we did do was after they got a mortgage, we paid into the mortgage the stamp duty, legal fees and stuff like that.  Having said that, I fully recognise that there are different views on this as well as different financial circumstances.

I have wondered at the documented loan aspect as I have heard of it before.  Things that spring to mind:  is interest be charged.  Should it?  If so, at what rate and does it have to be declared as income for tax purposes?  I don't have to concern myself with that of course but it is a subject for discussion.


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## StumpyPhantom (7 July 2012)

Judd said:


> We didn't assist with the deposit.  What we did do was after they got a mortgage, we paid into the mortgage the stamp duty, legal fees and stuff like that.  Having said that, I fully recognise that there are different views on this as well as different financial circumstances.
> 
> I have wondered at the documented loan aspect as I have heard of it before.  Things that spring to mind:  is interest be charged.  Should it?  If so, at what rate and does it have to be declared as income for tax purposes?  I don't have to concern myself with that of course but it is a subject for discussion.




The interest rate question is interesting.  Very difficult to formalise it in a family situation, and so also very difficult to know what to declare for tax purposes (which is legally required).  I remember borrowing about $17k and handing back quite a bit more a few years later when I became DINK and had the cash whereas a sibling has never paid it back, nor paid any interest in the meantime.

I think the main reason for the documented loan aspect is 'insurance' in case the child (unhappily) goes through a divorce.  That loaned money then doesn't end up part of the equity pie being carved up, which then vanishes from sight.  This is what happens with 'gifts', of course.

I know someone who went through 2 divorces at a fairly young age (and is now on her 3rd marriage, the first with kids and so looks like sticking).  But the earlier two marriages were accompanied by parental gifts as home deposits which got divvied up as part of the split, so there is nothing to show for it.

The 3rd marriage has also got a lump sum with it, but the happy grandparents probably consider the grandchildren a 'dividend'.  The things we do!


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## Julia (7 July 2012)

I had a completely informal loan arrangement with my mother for part of the funding of an IP at one stage.
We agreed on a rate that was slightly above what she would have obtained for a bank deposit and slightly below what I'd have paid for a bank loan.   

Worked out well but I do recall she was a bit annoyed when I paid it off and she had to accept a less profitable deal.


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## Judd (7 July 2012)

StumpyPhantom said:


> The interest rate question is interesting.  Very difficult to formalise it in a family situation, and so also very difficult to know what to declare for tax purposes (which is legally required).  I remember borrowing about $17k and handing back quite a bit more a few years later when I became DINK and had the cash whereas a sibling has never paid it back, nor paid any interest in the meantime.
> 
> I think the main reason for the documented loan aspect is 'insurance' in case the child (unhappily) goes through a divorce.  That loaned money then doesn't end up part of the equity pie being carved up, which then vanishes from sight.  This is what happens with 'gifts', of course.
> 
> ...





And the things we don't or shouldn't!

SP,

Have been chewing the cud over your comments (and my fingertips are sore – steel guitar strings – so I'll be as brief as possible with my views.)

Situations you have described can create difficulities.  My children have never asked me for a loan but my gut feeling is they should be avoided simply because of the tensions which can arise.  However, it is the parent's money and they can do what they like with it.

Maybe one avenue is to having documentation prepared by solicitor depending on the amount involved.  Probably not worth it if it is only, say, $1k or $2k but what if it is $20k or $60k?  Starting to get into what some would consider to be big money

Nevertheless, I don't believe that children necessarily have any right to expect parents to assist.  Probably my views are “strong” as I got nothing from my parents as they had nothing.  Actually, by my mid-twenties I was earning way more than my father so I help them out.  They were my parents, end of story.

As to my approach, my childrens' name were not on the mortgage documents nor are they on the title deed after the mortgage was discharged.  They have not contributed one red cent to any assets we purchased or to the running costs of the house, ie, rates, electricity, phone.

They did not pay for their health care, education, transport, food, accommodation or entertainment.  That came from our pocket.

So as far as I am concerned my children had, and still don't have, any right to expect any financial assistance from me.  If asked, I would certainly consider it but they had better be prepared to be satisfied what I determined I would be prepared to lend or gift and not what they anticipate or request.  And they cannot “back door” through Mum as she died in the early part of last year!  Not that they would have anyway.


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## StumpyPhantom (7 July 2012)

Perfectly valid views, J, so no disagreement from me there.  I was just putting myself in the situation that I anticipate in just under a decade when I hope to be retiring (or at least not working full time anymore) and watching the more senior people around me who I'm close to.

When they're comfortably retired and have spare cash, and are lucky enough to get in one or two overseas trips a year, I've just noticed their 'satisfaction rating' at splurging cash on their children (mortgage payments) and grandkids (childcare) to give them an easier ride just gives them this 'happiness' glow.

There's another thread in ASF started by Tyler with a youtube lecture on how much happier people are when they are gifting it than when they are spending it on themselves, so I suspect those with spare cash will find it hard to resist.


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## prawn_86 (7 July 2012)

Judd said:


> As a parent the first rule I stipulated to my children was Do not ask me to be your guarantor as the refusal will offend.
> 
> Get a mortgage on your own merits and don't burden them with the possibility, however remote, that they could lose the roof over their heads because of your activities.  My view only and others can do what they like.




Why not? If you can afford to help your kids get a start in life, and you trust them as being responsible then i don't see why it is an issue


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## young-gun (7 July 2012)

prawn_86 said:


> Why not? If you can afford to help your kids get a start in life, and you trust them as being responsible then i don't see why it is an issue




Agree, however it would be a risky move in the current market. Does anyone know what happens if someones parents puts up 100k of their own equity as a deposit, and 'guarantees' their child will service the loan, and then their property falls in value and they don't have 100k equity? Do you then have to come up with the shortfall in cash? 

I imagine this would be fairly hard for the banks to keep an eye on, as they would have to send valuers out every few months or so. Anyone know the ins and outs of the above hypothetical?


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## Smurf1976 (7 July 2012)

So far as family and money are concerned, my rule (learned the hard way) is pretty simple. 

1. Do NOT expect repayment. 

2. If you "lend" someone a deposit then assume that you are giving them the money and will not get it back.

3. If you go guarantor then assume that you may well end up paying out the loan and will not get your money back.

Follow these rules and a lot of arguments (and loans) will be avoided. Family and money can be a bad combination at least in my experience.

If the bank won't lend someone money without you giving them assistance then there's a reason for that. That reason being that the bank doesn't think they can afford the loan - and there's generally a valid a reason why the bank has reached that conclusion.

If the bank won't lend you the money then I'd either find a way to meet the bank's requirements or, if that can't be done, accept the bank's decision and focus on ways to improve your financial situation.


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## StumpyPhantom (8 July 2012)

young-gun said:


> Agree, however it would be a risky move in the current market. Does anyone know what happens if someones parents puts up 100k of their own equity as a deposit, and 'guarantees' their child will service the loan, and then their property falls in value and they don't have 100k equity? Do you then have to come up with the shortfall in cash?
> 
> I imagine this would be fairly hard for the banks to keep an eye on, as they would have to send valuers out every few months or so. Anyone know the ins and outs of the above hypothetical?




Simply because it is the most illiquid of assets, it doesn't work in the way you've envisaged above.

The 'valuation' really only happens if the bank forces the property onto the market for sale.  And that only happens if the borrower gets behind on repayments and/or forfeits on the loan.  This can all happen very quickly of course if you lose your job.

The banks are pretty ruthless at this point and will do a 'fire sale' and are interested in selling at almost any price that will give them their principal back and to hell with the $100k equity you or your parents put into it.


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## Judd (8 July 2012)

prawn_86 said:


> Why not? If you can afford to help your kids get a start in life, and you trust them as being responsible then i don't see why it is an issue




And I ask why?  Where is it written in law, as opposed to lore, that it is an obligation to which parents must adhere?

Your point, however, is valid.  If parents are in a position to financially assist, and wish to do so, then do it by all means.



StumpyPhantom said:


> Simply because it is the most illiquid of assets, it doesn't work in the way you've envisaged above.
> 
> The 'valuation' really only happens if the bank forces the property onto the market for sale.  And that only happens if the borrower gets behind on repayments and/or forfeits on the loan.  This can all happen very quickly of course if you lose your job.
> 
> The banks are pretty ruthless at this point and will do a 'fire sale' and are interested in selling at almost any price that will give them their principal back and to hell with the $100k equity you or your parents put into it.




Oh yeah.  Have I, and I assume a few of us, seen that happen.  Most recently to my former neighbours of many years.  Lost the lot trying to "help" their children.

And the view presented by Smurf1976 has merit in my opinion.


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## young-gun (8 July 2012)

Judd said:


> And I ask why?  Where is it written in law, as opposed to lore, that it is an obligation to which parents must adhere?
> 
> Your point, however, is valid.  If parents are in a position to financially assist, and wish to do so, then do it by all means.
> 
> ...





I think the simple fact that young people need to go to the lengths of asking their parents to help them buy a house is a sign that something is wrong.Expecting people to save a 20% deposit(although i don't believe this is true) even on a 300k house is a fairly tall order, and could take some many many years.

Does anyone know if going guarantor on a property was a common thing 20-30 or 40 years ago?


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## Julia (8 July 2012)

young-gun said:


> I think the simple fact that young people need to go to the lengths of asking their parents to help them buy a house is a sign that something is wrong.Expecting people to save a 20% deposit(although i don't believe this is true) even on a 300k house is a fairly tall order, and could take some many many years.



People saved around 20 - 25% in those distant days when debt was only used for a mortgage, rather than the current practice of running one's life on debt.

I do remember, though, that in NZ there was a government mortgage available for first home buyers at 3%.
That figure is a bit irrelevant, however, when I can't remember what other interest rates would have been at the time.
We saved the deposit for our house by both living with parents before getting married, and both working two jobs for some years.




> Does anyone know if going guarantor on a property was a common thing 20-30 or 40 years ago?



No.   It was no less risky then than it is now.   We were given money towards buying the block of land as a wedding present by my parents.   Imo it's fine to give your kids some help as long as they're making every effort themselves, never if they have a sense of entitlement and expectation that you should do it.

Often far more useful at that stage of their lives than when you die.


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## Smurf1976 (8 July 2012)

I should have added to my previous post that I'm not saying I would never lend anyone money, just that if I choose to do so then I am accepting what amounts to a very high risk situation which may end badly.

Of course, if you can afford to treat the "loan" you are providing as a gift and have no expectation of ever being repaid then it's a very different scenario and there's less reason to be cautious.


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## young-gun (9 July 2012)

Julia said:


> People saved around 20 - 25% in those distant days when debt was only used for a mortgage, rather than the current practice of running one's life on debt.




Absolutely, not making excuses, I'm simply curious as to comparisons between 30 years ago and today, the biggest being, as you stated, that debt is now taken on without so much as a second thought. From plasma tv's and fast cars to speculating on investments of all types.



> We saved the deposit for our house by both living with parents before getting married, and both working two jobs for some years.




Sorry but living with my parents(although now split) for this long was simply not an option for me




> No.   It was no less risky then than it is now.   We were given money towards buying the block of land as a wedding present by my parents.   Imo it's fine to give your kids some help as long as they're making every effort themselves, never if they have a sense of entitlement and expectation that you should do it.




I would have to disagree and say that going guarantor for your children on a property right now is possibly once of the riskiest moves anyone could make. Again I'm unsure of the economic picture painted some 30 years ago, perhaps it did look as grim as it does at present.

Agree with the helping out, or simply giving your children a hand. My sole aim at the moment is to establish enough wealth over the next few years to give my family/future children the absolute best chance in life, with hopefully very limited financial concerns. And no I don't mean bring them up to be little rich snobs. 
....I imagine parenting is a very delicate task.


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## Steve C (9 July 2012)

I am in the process of building my first house with my partner and have recently undertaken a mortgage. We borrowed $415k with a 10% deposit (we required mortgage insurance). I explored options in regards to guarentor's and it is just to risky to put your parent's house up as protection, who knows what might happen in the future. I was also offered 45k by my partners parents to avoid having to get the mortgage insurance but I didn't want to have that "I always owe them something" mentality and decided to stand on my own two feet.

Our parents did however put in $8k each as a gift (engagement present) to help bring us up to the 10% deposit and also cover the fees (don't forget that there is also around $7k in fees and mortgage insurance over and above the base 10% amount).

All the best,

Steve


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## Glen48 (9 July 2012)

OUCH That will hurt in years to come!!!.


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## Julia (9 July 2012)

Steve C said:


> I am in the process of building my first house with my partner and have recently undertaken a mortgage. We borrowed $415k with a 10% deposit (we required mortgage insurance). I explored options in regards to guarentor's and it is just to risky to put your parent's house up as protection, who knows what might happen in the future. I was also offered 45k by my partners parents to avoid having to get the mortgage insurance but I didn't want to have that "I always owe them something" mentality and decided to stand on my own two feet.



Good for you.  



> Our parents did however put in $8k each as a gift (engagement present) to help bring us up to the 10% deposit and also cover the fees (don't forget that there is also around $7k in fees and mortgage insurance over and above the base 10% amount).



Sounds OK, Steve.
Just a question which of course you're not at all obligated to answer:
is servicing the mortgage dependent on both of you working, and if so, how would you manage the situation were one of you to no longer be working for whatever reason?


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## Steve C (9 July 2012)

Glen48 said:


> OUCH That will hurt in years to come!!!.




Are you referring to the size of my mortgage? I agree, it is by no means small but you will find lots of first home buyers borrowing more then that. With current interest rates my weekly repayment is around $600 a week, which is much better value then paying $500 in rent and paying someone else's loan - probably borrowed a bit more then I would have liked to but its a great location near the city and its a new 3x2 house, I could sell it the day after its built for $500k so not to concerned... yet (prays interest rates don't go 10%+ in the next couple of years)


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## Steve C (9 July 2012)

Julia said:


> Good for you.
> 
> 
> Sounds OK, Steve.
> ...




Sorry about the double post - Yes Julia I believe it is calculated on both of us earning a salary...I have income insurance in case their is a worst case scenario and luckily both our parents are stable financially so worst worst case scenario we could always rely on them as a safety net or simply sell the house and take a nice little profit even in the current market. In coming years I will advance in my career and start earning some good money which will help things. Sorry to jack your thread OP! - a good lesson though, don't borrow more then you can comfortable repay!


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## TMC93 (10 July 2012)

I have been looking at buying a house recently in a few locations, mainly brisbane/mackay/rockhampton as thats where my work is based, can comfortably afford a 10%-15% deposit on some nice houses in all of the areas but like the stock market, i am going to wait a bit longer and save for 20-25% as the property market is not going to vanish overnight (that i am aware of). Buying property is a huge thing for me and i wouldn't take any decision likely but for a lot of my friends they are pretty much long term renters which doesn't suit me.


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## Glen48 (10 July 2012)

They are all renters, only the the landlord could be a bank or private individual.
 Save up your 25% and pay cash in a few of years time


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## young-gun (10 July 2012)

Steve C said:


> I have income insurance in case their is a worst case scenario




I'd recommend checking with your super fund to see that they don't provide you with income protection. Some are a bit average, but mine is fairly comprehensive, and means I don't require income insurance. No point in paying for something twice, and if you do check it out make sure you research the super funds policy thoroughly.


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## Judd (25 July 2012)

Hmm, financial journalists must be scouring the forum looking for subject matter on which to provide worthy articles to justify their salary.  Just kidding.  

http://www.smh.com.au/money/planning/home-help-has-strings-attached-20120724-22lfg.html



> *Home help has strings attached*
> 
> Date    July 25, 2012
> 
> ...


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