The dream of homeownership remains a cornerstone of the Australian way of life, but for many young Aussies, this dream is becoming increasingly out of reach. As property prices continue to soar, a growing number of parents are stepping in to help their children secure a foothold in the market. This trend, often referred to as the ‘Bank of Mum and Dad’, sees parents offering financial assistance for home deposits, effectively providing an early inheritance. However, this seemingly generous act of support is not without its pitfalls and could jeopardise the financial security of the older generation.
The ‘Bank of Mum and Dad’ phenomenon has been on the rise, with a recent poll of nearly 1,600 Yahoo Finance readers revealing that 10 per cent had received upwards of $100,000 from their parents to purchase a home. Kate Browne, Compare Club’s Head of Research, has observed a ‘fundamental shift’ in the way younger Australians are entering the property market, with parental support transitioning from a ‘nice advantage’ to an almost essential requirement for many first-time buyers.
The allure of gifting an early inheritance is strong for some parents. They not only get to help their children when they need it most but also have the opportunity to witness the positive impact of their generosity. Compare Club’s research indicates that one in five parents have already provided substantial financial support to their adult children, with an additional 47 per cent considering doing so.
Take the example of Pauline and Tony Saarman, who decided to help their children with 20 per cent deposits for their homes by using loans from their offset account. They had previously charged their adult children rent while living at home, saving this money to contribute towards their early inheritance. Despite the success of their strategy, Pauline expressed her shock at the escalating property prices, noting that even a basic home could cost as much as $1.3 million at auction.
However, this approach can backfire for some families. Compare Club warns that intergenerational financial support ‘comes at a cost’. Six per cent of parents have either taken out reverse mortgages or plan to do so to assist their children, potentially compromising their retirement security. Browne cautions that when parents deplete their savings or incur debt to help their offspring, they often sacrifice their own financial stability, effectively operating as an unregulated lending institution, but without the necessary safety nets.
If you’re considering becoming the Bank of Mum and Dad, it’s crucial to protect yourself. Finance expert David Koch advises parents to formalise any financial assistance. This could mean drafting a written agreement, involving a lawyer to ensure the terms are clear and legally sound, and treating the arrangement with the same seriousness as a bank would. Whether the money is a gift, a loan, or you’re acting as a guarantor for a mortgage, having a clear, signed document can prevent misunderstandings and ensure that expectations are met.
There are certainly upsides to tapping into the ‘Bank of Mum and Dad’, such as enabling a smaller deposit, avoiding lenders’ mortgage insurance (LMI), and not incurring costs for the parents if the borrower is diligent with repayments. However, the downsides are significant. Parents may become liable if the borrower defaults, their borrowing power could be impacted, and they might even risk their own home.
Have you provided financial support to your children in purchasing a home? What steps have you taken to protect your financial future while helping them? We’d love to hear your thoughts and experiences in the comments below.
