Bank of mum and dad putting strain on older Australians

Rather than spending their nest eggs enjoying their retirement, more and more older Australians are being called on to help adult children into the real estate market.

Unless you’ve been living under a rock, you’ve probably noticed house prices have skyrocketed over the past 20 years, and particularly over the past 10.

The amount first homebuyers now need to save for a deposit means many have simply been priced out of the market.

In order to secure a home, many young adults are turning to the ‘bank of mum and dad’ – or getting their parents to foot at least part of a deposit, if not the whole thing.

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According to research from Compare the Market, two-thirds (66 per cent) of first homebuyers were intending to get at least some of their deposit from their parents.

Around 21 per cent said their parents would be covering their whole deposit, with 41 per cent expecting to get part of their deposit from mum and dad, while 23 per cent said their parents would act as a guarantor.

Loans from parents to children total around $35 billion annually, making the bank of mum and dad the nation’s ninth-largest residential mortgage lender.

Compare the Market found the average deposit saved for first homebuyers was around $77,000, which is roughly 10 per cent of the national median house price of $748,635.

Read: How well off you are depends on which generation you are

“More young adults are turning to their parents as their savings can’t keep pace with house prices that grow by thousands each week,” says William Jolly, spokesperson for Compare the Market.

“Everybody wants to see their children thrive, yet millennials are thought to be the first generation worse off than their parents.

“Some parents who are established homeowners are more than happy to dip into their equity to support their children.

“Sadly, not all families are lucky enough to afford such large donations. For them, the wealth divide keeps widening.”

Apart from draining the retirement savings of thousands of older Australians, parents helping children with house deposits can also have negative impact on eligibility for the Age Pension.

Read: Sharing property with your children and forgiving loans

Whether your pension eligibility is affected depends on whether the money was given as a gift or as a loan.

If you’re giving the money as a gift, a single person or couple can only give $10,000 per financial year, with a limit of up to $30,000 over a five-year period. If any more than this is gifted, Centrelink classes the excess amount as a ‘deprived asset’.

If the money is treated as a loan, then Centrelink will treat it the same as any other investment – with an annual rate of return determined by deeming rates, even if you aren’t charging your children interest.

You may feel comfortable setting up a verbal agreement for loan terms with your children, but it’s important to protect yourself legally by setting out the loan terms in a statutory declaration.

David McKenzie, co-chair of the Law Institute of Victoria’s property law committee, says legal battles between parents and adult children over money given for house deposits are growing in number.

“Five years ago, you’d get maybe one (court action) a year,” he says.

“This year, I would have handled at least three or four.

“The terrible thing about these things is if mum and dad are getting on and are near the retirement phase, they will effectively be putting money out of their pension pool into this property. The idea that that could be at risk and affect the parents later on is also a pretty horrifying prospect.”

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