Bank of mum and dad among top 10 housing lenders

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

According to data from Digital Finance Analytics, parents are now the ninth biggest lender for housing in the country, beating HSBC and Citibank.

The data claims that almost 60 per cent of first home buyers are helped by their parents, whether that be through gifts or loans for a deposit or by buying a property for them. The average payment is $100,000.

For some, a helping hand from a willing parent may be the only opportunity to get into the soaring Australian property market.

The Australian Bureau of Statistics put the average price of an Australian house in the December 2021 quarter at $920,100. Property prices rose 23.7 per cent in the 2020-21 financial year.

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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, loan part or all of the money or gift it outright.

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.

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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.

Outright gifts will also need to be documented, especially 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.

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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.

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.

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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

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