Beware of the dangers of becoming the bank of mum and dad

Three golden piggy banks

One of Australia’s biggest home loan lenders is the bank of mum and dad.

According to data from Finder.com, Australian parents will give their children an average of $33,278 to help with a house deposit. And more than 60 per cent of first home buyers in Australia receive some form of financial assistance from their parents to buy their first home.

The Australian Bureau of Statistics put the mean price of an Australian house in the March 2023 quarter at $896,000. Property prices rose by an average $8500 in the same period.

That’s helping people buy homes in the short term, but could also be a game changer over the longer term. Financial advisory group Mozo says a $400,000 interest-free loan that’s repaid over 30 years could save almost $220,000 in interest alone.

And while many parents are happy to help out their children in a competitive market, there are issues that should be made clear to both parties before any money is made available.

Parents have several options to help their children into the property market. They can go guarantor to the loan, lend part or all of the money or gift it outright.

Thorough research

However, both parties must be clear about the terms and conditions of the transaction and certainly for the bank of mum and dad there needs to be thorough research into the financial implications.

Perhaps the simplest way to help is agreeing to be a guarantor on a loan. It may seem easy to put your name on a piece of paper, but if your family member defaults, then you are responsible for repaying the loan and your credit is at risk.

Digital Finance Analytics principal Martin North told savings.com.au that first home buyers who borrow from their parents are between three to five times more likely to default on their loans in the first five years.

“Banks are reluctant to lend in these circumstances compared with a record of regular savings,” he says.

Also, being guarantor may compromise future borrowing capacity and credit ratings as it will need to be declared on any loan applications, he says.

If you are thinking of lending the money, make the terms of repayment very clear and be sure to document all agreements.

You can lend money with no intention of it being repaid.

Kelly Kennedy, a financial adviser for tax and financial consultancy BDO told the Australian Financial Review that such a strategy would protect the funds if there was relationship breakdown.

Liabilities

Funds subject to a loan agreement would be considered a liability in family law proceedings and be repayable to the parent in full.

“This would safeguard and protect the monies provided to your children if a relationship breaks down,” she says.

Funds subject to a loan agreement would be considered a liability in family law proceedings and be repayable to the parent in full.

Outright gifts will need to be documented if you are receiving any financial aid from the government such as the Age Pension. There are limits to how much can be gifted and anything over those limits can affect payments.

However, if the child defaults on a mortgage, the parent will not be responsible for any debts.

It’s also sensible to reference these gifts and loans in a will so all offspring are aware of the financial situation.

Another way parents are helping their children is by becoming co-owners. Once again, this could have implications for the Age Pension as any property would be considered an asset and could affect payments and be subject to tax when sold.

Don’t forget about the future

Do your research before raising your hand at an auction. Lending institutions may require extra paperwork or financial guarantees – such as a larger deposit – before they lend when the bank of mum and dad is involved.

And don’t forget about the future before you decided to hand over cash in any form. Do you have enough for any unexpected bumps in the road, or even exisiting obligations.

The YourLifeChoices 2022 Insights survey found that almost 48 per cent of respondents were still paying off their own mortgage, much less helping their children out.

Have you helped your children buy a home? Was it a gift or a loan? Why not share your experience in the comments section below?

Also read: How can you build retirement resilience?

Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.

Written by Jan Fisher

Accomplished journalist, feature writer and sub-editor with impressive knowledge of the retirement landscape, including retirement income, issues that affect Australians planning and living in retirement, and answering YLC members' Age Pension and Centrelink questions. She has also developed a passion for travel and lifestyle writing and is fast becoming a supermarket savings 'guru'.

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