Economic downturn could ruin retirement for generous parents

The ‘bank of mum and dad’ is one of Australia’s most significant lenders.

The ‘bank of mum and dad’ urged to be cautious with retirement savings

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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    COMMENTS

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    Eddy
    4th Sep 2017
    11:43am
    Never lend more than you can afford to lose.
    sidney70
    4th Sep 2017
    12:52pm
    Spot on Eddy.
    Jtee
    4th Sep 2017
    11:45am
    Stephen Koukoulas' advice that young people should look at their expectations for their first home is a great point. That was the advice given when we older generation were starting out. Who can remember the 2 bedroom fibro house as the starting point to affording your own homes. Not great to look at but a step onto the property ladder.
    KSS
    4th Sep 2017
    12:54pm
    I agree Jtee, start with what you can afford and work up to what you want!
    Anonymous
    4th Sep 2017
    2:47pm
    Sitting on 2 directors chairs and eating off a small round wrought iron table ..sleeeping in a second hand bed bought for $100 and the list goes on. How many these days would want to do that. No,no, no. It has to be brand new from Harvey Norman and very fashionable.

    You can get into a home if you are prepared to lower your expectations to get your foot on the first rung of home ownership and go without the smashed avo and vegemite and $20 cocktails.
    KSS
    4th Sep 2017
    3:05pm
    Wow Radish, you were well off! Upturned wooden packing case and two piles of bricks and a plank was what I started with! :-)

    Graduated to a sofa salvaged off the street and gradually worked up through other people's cast offs. hahaha
    johninmelb
    4th Sep 2017
    3:24pm
    All I had when I left home was my bed, a desk and chair, some homemade bookshelves, 2 old lounge chairs from my grandmother, and an old portable tv.

    I bought some curtains for the bedroom, and a few kitchen utensils at a Venture sale before I moved in. I had bare wooden floors, sheets on the windows, and not much else.

    Once I got my Home Savings Grant about 9 months later, I found some cheap carpet for the lounge and master bedroom, and a cheap lounge suite that lasted for years. But I lived with bare boards, no dining table and other comforts for a long time. Used to do my washing and ironing at Mum's once a week till I could get a washing machine etc.

    At one point I was paying 18% interest on my mortgage. But I only bought necessities, went without the luxuries, and paid my house off in 10 years. I even managed a 3 month long service leave holiday in the USA during that time. Just a matter of working out the priorities, saving for what is important, and ignoring the frivolous. Over all, I didn't do too bad.
    Anonymous
    4th Sep 2017
    4:46pm
    LOL, what gets up my goat is when I hear that our generation had it easy...what a load of bunkum.!! No overseas trips in the so called "gap year" in my day....straight from school at 15 into a job in the city of Brisbane on my own living in a bed and breakfast hotel. Scraped and saved all m working life.
    Triss
    4th Sep 2017
    8:28pm
    Yes, Radish, having the luxury of chairs. We started off sitting on upturned suitcases.
    ex PS
    5th Sep 2017
    8:20am
    Jtee, that advice has been given by many people who contribute to this site, I am amazed that it is not seen as the obvious strategy by first home buyers.

    4th Sep 2017
    12:08pm
    This is like being in the Army; Greatcoats on! Greatcoats off! It's not all that long ago that we were warned, on this site, not to use the family home to support children buying real estate as the end result could be having to sell up to repay a part of the children's loan. Now we are being told, in a roundabout way, to support the children by using the family home.

    I think that there are no hard and fast rules for lending or guaranteeing children with their housing purchases. Some people have children who should not be lent to and there are children who will do anything to ensure that parents aren't put into financial difficulties. To each his own as each of us know our children better than anyone else. I will choose who I will lend to and the method by which I lend.
    Rosret
    4th Sep 2017
    12:59pm
    “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.
    When a parliamentarian starts actually doing the house hunting trek with their children and understands the complex and daunting situation then I will start listening.
    I looked at the filthiest, horrible units for $500K that were only half that price two years earlier.
    There is no way I would let a little family live in these dwellings. We didn't work all our lives for our children to live in slums.
    In the 4 month period he searched for a home the prices went up $40K. You just can't save that sort of money.
    Eventually, he found a unit (over priced) and then the saddest thing happened. Everyone else in the 4 unit block were tenants and were asked to leave as each of the other units went up for sale. They were all different owners but the money carrot was dangling in front of their noses.
    Now what my son is concerned about is what the body corporate votes to improve - none of which he will be able to afford.
    Its an awful situation and I just wish they would stop talking about avocados, laziness and the party generation. It is so not true.
    FrankC
    4th Sep 2017
    2:38pm
    Going up $40K in 4/12 is just plain unadulterated GREED, no other word for it. It is greed that is bringing this once great country to its knees.
    I was shocked the other day, when I rang NRMA, to find myself speaking to a guy in the Philippines, where else !!!! I mentioned to him that NRMA is probably paying his boss $15 / hour, and he is paying you maybe $5.00 / our. He replied ,'Oh !" One good thing about Red Energy, their customer service centre is in Victoria, where you can understand what is being said, and they can understand you!
    That's why I am with them for supporting young Aussies in a job.
    KSS
    4th Sep 2017
    3:11pm
    Just keep your fingers crossed that it is only the unit owners that might want upgrades. Wait until the Council does a fire audit that you cannot argue with.

    This happened to the block I bought into 5 years ago and we were each up for over $10,000 and there are 12 of us.

    Now with the audit of cladding some unit owners could be up for $100,000 each to rectify. Be grateful if your son is in an older brick building.

    And don't forget that the other three owners also had to pay 'big money' so you could well be worrying about nothing. At least in the short term.
    Rosret
    4th Sep 2017
    6:30pm
    A fire audit - mmm- it did cross my mind. I wanted to buy him a rope ladder just in case.
    Patriot
    4th Sep 2017
    1:05pm
    The mechanism that ensures the BANKSTERs "Make-their-Money"
    They never seem to miss out - do they?
    ex PS
    5th Sep 2017
    8:17am
    If I gift my son the deposit for his first home, will MT waive the deeming rate on that money. Come on MT you made the suggestion, time to put up or shut up. I am sick of politicians making glib remarks and then not following up.
    I am considering giving our son an interest only loan at 4%, that way he will get a home and we will get the required deeming rate plus. Of course we will structure the loan so that when we are both gone the house goes to our son and the debt is discharged.
    Of course we will employ a good lawyer to protect us all in the event that things go south, but I see the risk as minimal. Sale of the house will of course require payment of the loan in full. I think the biggest mistake people seem to make is to not document their intentions ans get legal advice.
    MacI
    7th Sep 2017
    10:28am
    While I agree with the obvious advice that anyone looking to get into the housing market needs to match their expectations to their ability to finance them I do take issue with the commentary about how tough it was in our day - if only the younger generation would show the same frugality and grit that we did.

    I was reading an article by the respected financial advisor, Noel Whittaker where he compared personal finance in 1987 with today. In 1987 in Brisbane the average cost of a house was $62,000 which was 2.6 times the average income of $24,000. Today in Brisbane the average cost of a house is about $500,000 which is more than 6 times the average income of $80,000. Those who entered the housing market in 1987 can point to rampant inflation of 11% and 15.5% home loan interest rates but the interest rate and inflation rate averaged out over the course of a 25 year loan taken out in 1987 was nothing like was in 1987.

    By every measure home ownership is getting harder and harder. From 1994 to 2011 the percentage of the population renting has gone from 25.7% to 30.3%, home owners with a mortgage from 29.6% to 36.6%, home owners without a mortgage from 41.8% down to 30.3%. The trend has been continuously getting worse. Let's not be too harsh in our judgement of younger generations. I reckon they are in a far tougher situation that we were. It is so far out of reach for so many living in our cities that they have given up on the aspiration of ever owning their own home.
    alinejordan
    22nd Sep 2017
    10:55am
    only read the first few ridiculous entries.. we all buy stuff from the opshops, but in the '60ies you could buy a house in Brighton for $11K. now it's worth over a million$$$$.. how can you get stuck in your petty buying of furniture second hand, or found on the pavement, when the problem is obviously so much bigger. i for one am sure glad i'm not having to condider getting into the housing market at his stage. wake up folks and please stop the continuous cliched crap about crushed avo. it's boring!
    Anne
    22nd May 2018
    6:49pm
    I will not be lending or gifting money to help my son buy a home for his family. However, I am seriously considering co-ownership. I have three children; two are fine without a step-up. I want to help my son and daughter-in-law (and granddaughter) get on the property ladder, but don't want to jeopardise the future inheritances of the others, or my own ability to draw on my capital for health reasons if necessary. I believe co-ownership will protect my funds better than other options. I'd love to see Your Life Choices explore this as a topic.