The Bank of Mum and Dad is one of the most discussed concepts when it comes to young people saving for their first home.
Official data on the financial strength of this so-called “bank” is absent in Australia, although a survey by Finder.com.au – a comparison website – claimed it was worth $35 billion and parents gave their children an average of $30,000 to buy a home.
One estimate suggests 60% of young Australians have received financial assistance from their parents.
Some 7% of parents may be a guarantor for a first home loan, which is considerable given the risks parents take when agreeing to this level of support.
A survey this year by another mortgage comparison site, Mozo, found that only 3% of parents expected their children to repay the loan in full and with interest. However, 12% said they expected all their money back.
Using the Bank of Mum and Dad has serious implications for both the parents and their offspring who are buying their first home. The scenario becomes even more complicated if there is a partner or spouse involved.
Here’s a breakdown of the key forms of assistance:
Cash Gifts – A lump sum is the most common form of parental support and often contributes towards a deposit or other upfront costs, like legal fees.
Private Loans – Parents will often lend money with the expectation of repayment. Written legal agreement is recommended to avoid misunderstandings and even a potential legal fight if the loan is not repaid.
Guarantor – Sometimes, parents will use the equity in their own property as security for their child’s home loan. Parents become liable for the loan if their child (and maybe partner/spouse) defaults. Again, a legal document is recommended to protect everyone’s interests.
Co-purchasing – There are a variety of ownership structures, each with different legal and financial implications. For example, certain assistance may disqualify a first-time buyer from a grant or stamp duty relief. So, it’s important to research first homebuyer assistance implications.
Future view – From the parents’ perspective, they need to carefully assess their financial situation to avoid compromising their future, especially any retirement plans.
Seek advice – Professional legal and financial advice is critical so everyone understands the implications, including any issues concerning wills, and the fair distribution of assets, especially among all the children of the family.
NOTE: The information in this article is general in nature and provided as a market overview only. Always consult your financial advisor or accountant for advice specific to your personal circumstances.