2021 was the year we saw property values soar to record heights. It was also the year that the so-called Bank of Mum and Dad became one of the biggest lenders in the country. The BOMAD is now the ninth biggest mortgage lender according to analysis by Digital Finance Analytics (DFA). Parents are lending adult children an average of $92,000, which equates to an 84% contribution to the average first-home buyer deposit.
And if you think it’s just rich kids getting a leg up onto the property ladder, think again. Today, a remarkable 60 percent of first-time buyers receive financial assistance from their parents, according to DFA.
So why has this happened? Firstly, this is playing out in a market that has seen house prices grow at the third-fastest rate in Australian history. Stagnating wage growth, burdensome HECS debt and skyrocketing property prices have locked many millennials out of the market; while their parent’s generation has reaped the wealth of the property boom and enjoy record rates of home equity.
Sure, first-home buyers are benefitting from generous Government assistance schemes and record low interest rates, but for many, raising a deposit that is large enough to avoid LMI (Lenders Mortgage Insurance) is almost impossible.
In October, finance comparison site Mozo released the results of a survey of more than 1000 Aussie parents who had helped their children realise their property ownership dreams. It found 52% of the parents dipped into their own savings, another 29% paid with their income, 22% cut back on expenses and 21% used the equity in their own home.
Alarmingly, just over two thirds of the parents surveyed said they may be risking financial hardship by helping their children purchase a home. But perhaps it’s more a reflection, that we would do anything for our kids. If you suspect that anytime soon a tranquil Sunday family lunch will be disrupted by your children throwing a home loan request onto the table, it’s best that you have thought it through beforehand.
If you’re a parent considering helping a child with a home loan, here are some important things to work out before signing on the dotted line:
- Whatever financial agreement you reach, put it in writing. Preferably this will be a legal document, but at the very least it should document the amount, purpose, term, interest and details of any security.
- You should consider possible capital gains tax exposure and impact on social security. Putting their names on the title increases legal protections for their adult children but will also be considered the parents investment and subject to tax when sold.
- If you’re considering going guarantor, you must know that this will make you liable for mortgage payments if payments slip behind or settlement of outstanding debts.
- If you’re using equity in your home to help fund your child’s property purchase, you may have to pay a higher interest rate on your own home loan.
- Gifting money to your children doesn’t come with tax obligations for them. However, if you’re receiving the Age Pension or other government benefits, there are limits and consequences for your own income.
- If you’re under pressure or facing financial hardship, be sure to speak to your lender and seek professional advice before committing additional funds towards your children’s property goals.