Gifted equity home loans: buying from family

A favourable purchase is a sale at a discount, usually between related people. The seller gives up some of the property's value instead of transferring deposit money into your account.

Some lenders can assess an eligible family purchase against an accepted market valuation rather than using the lower contract price. We need confirmation for the exact relationship and transaction. A family agreement about what the home is worth is not a lender valuation.

Loan to value ratio (LVR) is the loan amount divided by the value the lender accepts, expressed as a percentage.

Borrowing the full $800,000 is above 80% of the accepted value, so lenders mortgage insurance (LMI) may apply. These figures depend on the lender accepting $950,000. At a $900,000 valuation, an $800,000 loan would be about 88.9% LVR. A lower value can change the cash required and loan costs, so I would check it before the contract becomes unconditional.

The lender needs to know that the discount will not be repaid. ING, for example, publishes a Gift Policy Statutory Declaration for gifts towards a property purchase. Its form records the gift amount and who receives it.

For gifted equity, I would confirm which declaration and valuation rules the lender requires for the family sale. Our ING review explains its favourable-purchase approach. The contract and declaration must match what the family has actually agreed.

If the bank's value is lower than expected, our guide to challenging a bank valuation explains what evidence can help and when a review is worth requesting.

Buying only a share of the home needs another check. The owners, borrowers and use of the property may differ from a full transfer. Our guide to buying a house with your parents explains the ownership questions.

A discounted price does not necessarily reduce transfer duty. In Queensland, duty is usually calculated on the higher of the consideration and the property's unencumbered value, subject to any applicable concession or exemption. The Queensland Revenue Office explains the calculation.

Queensland requires independent evidence of value for a gift or a sale between related people, so expect a valuation for duty as well as for the lender. The family member selling should get tax advice first. If a property is sold to family for less than it is worth, the ATO treats the seller as receiving its market value for capital gains tax. A main residence may be exempt. A discounted sale can also affect pension entitlements and how the estate is shared between other children, so the seller should get advice on both before signing. The effects depend on the transaction and the seller's circumstances.

I would confirm how much the seller actually receives after their mortgage payout and costs. A generous discount can leave them with less cash for their next home or retirement than they expect.

If you are buying an unrelated seller's home, a family discount is not available on that purchase. A guarantor loan or cash gift may still help. Compare the ways parents can help you buy before deciding.

Client examples are based on real situations. Names and identifying details have been changed.