The ‘bank of mum and dad’ is one of Australia’s most significant lenders, but parents are being urged to exercise caution, as projected economic downturns could ruin retirement.
A recent survey from Digital Finance Analytics has revealed that, outside of the major banks, the ‘bank of mum and dad’ is one of the country’s most significant lenders, with around $16 million in outstanding loans.
Many parents are helping children with house deposits or paying stamp duty fees on their behalf. The study estimated that the average amount shelled out by parents to their children is around $88,000.
But finance experts are warning older Australians to be cautious about helping their children into the property market.
Financial advisers say that there may be other ways to help your children into the housing market, such as:
- lending or gifting them the deposit
- unlocking the equity in your home and using this for a deposit
- opt to co-own the property with them.
“If you do decide to unlock your equity or co-own a property it’s really important to ensure your children ‘buy-in’ to the project and understand your risk. It is unhelpful to everyone concerned if you assist your children with a deposit and they subsequently find the mortgage repayments burdensome. It’s important not to over-extend on borrowing and to make sure from the outset that the loan can be repaid at an interest rate of eight per cent,” said financial adviser Melissa Browne.
“Then you will be in the strongest possible position to help your kids later, when they may really need your financial assistance.”
Stephen Koukoulas, economist and former Senior Economic Advisor to the Prime Minister, said that aside from educating the younger generation to spend less than they earn to save for a house, they should also lower expectations of what their first home will be.
“Getting onto the housing ladder has always been a challenge, and, therefore, some young people may need to adjust their expectations of what their first home might look like,” he said.
“In saying that, done conservatively and in the right circumstances, paying off a home from a young age can be a fantastic way to use compound growth in your favour to establish your financial security.”
Stephen Koukoulas, Melissa Browne and other financial experts will be speaking at the Money for Life seminar on 7 October.
Have you loaned your children money for their home? Have you any advice for potential lenders?
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