What is a BOMAD? Are you willing to become one for the kids?

Do you go mad at the thought of BOMAD? Do you even know what BOMAD is? You might not have heard of the acronym, but if you have adult kids there’s a good chance you aware of the concept.

BOMAD stands for ‘Bank of Mum and Dad’. And for many, BOMAD is their only chance of getting into the property market.

A new report published by the Australian Housing and Urban Research Institute (AHURI) puts into sharp focus the difficulty young adults have in purchasing property without parental or family assistance.

The report found that, of those aged 25 to 34, 40 per cent expect to call on the ‘Bank of Mum and Dad’ if they are to achieve their dream of owning a home. Many of them are simply unable to put together a deposit without help from family.

According to AHURI’s report, 74 per cent of adult renters holding savings of less than $5,000, making the prospect of buying property a very unlikely one – unless they have family to call on.

That’s where BOMAD comes in. And if you fall into the BOMAD category as a potential lender, while you are probably keen to help the kids buy their first house, you might also be concerned about how that will affect you.

In simple terms, there are three basic ways you can take on the BOMAD role, and each of the three comes with its own risk, either to you or your kids.

  1. The first way is by far the most common. It involves you as parents helping to fund your kid’s purchase by withdrawing from your own nest egg or retirement savings. Sounds like a great idea, but will it negatively impact your life down the track? If it’s a loan, perhaps not, depending on the agreed repayment timeframe.

    But if it’s a gift, there’s a couple of things two consider. The most obvious is that you won’t be seeing that money again, which means you may have to alter future plans. And if it is a gift, will it affect your pension?

    The short answer to that is that it won’t, provided it’s no more than $10,000 in any single year and under $30,000 in any five-year period. If you are planning to gift more than that, financial advice would be in order.
  2. Alternatively, you could be a co-mortgagee on the purchased property. But this could affect you (you will be liable if your kids miss their payments) or you child, who might miss out on first home-buyer incentives offered by state and federal governments if your signature is on the mortgage.
  3. The third option is to become a guarantor on the mortgage. Again, this will put you in the firing line if your kids default on the repayments, and you could theoretically lose your own home.

If you feel comfortable and secure with any of the above options, that will be good news for your kids, but what about those who aren’t – for whatever reason – lucky enough to have access to the Bank of Mum and Dad?

The lead author of the AHURI report, Dr Laurence Troy, says: “Government should wind back tax concessions given to property investors that supports increasingly polarised and unequal wealth accumulation at the expense of those increasingly locked out of home ownership.”

Dr Troy also believes the government should direct housing expenditure towards supporting supply of social and affordable housing.

Joey Moloney, a senior associate from the Grattan Institute, said the fundamental issue was that housing supply was not keeping up with demand. “The problem is that there are too many constraints on the construction of new housing,” he said.

Any potential solutions to such problems, even if agreed to be federal and/or state governments, won’t be implemented in a hurry. Which means you should be prepared for the prospect of being asked to become a BOMAD for your adult offspring.

Are you already a BOMAD? What impact has it had on you? Why not share your thoughts in the comments section below?

Also read: Why the housing wealth gap between generations is getting wider

Andrew Gigacz
Andrew Gigaczhttps://www.patreon.com/AndrewGigacz
Andrew has developed knowledge of the retirement landscape, including retirement income and government entitlements, as well as issues affecting older Australians moving into or living in retirement. He's an accomplished writer with a passion for health and human stories.
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