The Bank of Mum & Dad
With the cost of housing on the rise and incomes across Australia remaining static, more aspiring young home owners are turning to the bank of Mum and Dad for a leg-up into the property market. Put your stereotypes about spoiled kidults aside: millennials who are struggling to save for their home deposit aren’t lazy or unfocused. There are many savvy savers out there unable to secure an all-important first home – whether that’s because they’ve been priced out of the market by cashed-up investors, barriers to lending or simply a surplus of demand for affordable property. Little wonder then that Mum and Dad are being called upon to step in and save the day. But, at what cost? In today’s Hatch Financial Services blog, Tim Gaspar explores the ins and outs of helping your adult children into the property market.
How Can Parents Help Their Kids Enter the Property Market?
As I often observe, the ‘Bank of Mum and Dad’ generally opens for business during a child’s late teens and early 20s. Payments by the BOMAD (as I like to call it!) to their children regularly come in these three denominations:
- Lump sum cash gifts to help their child with a mortgage deposit.
- Free or substantially discounted rent and living expenses well into adulthood, if the child lives at home.
- Going ‘guarantor’ a home loan, to enhance a child’s borrowing power in the eyes of lenders.
Item 1: Cash Gifts
Many Baby Boomer parents have enjoyed substantial capital growth on their homes in recent years, meaning they may have additional funds available to help their child with a deposit.
A cash gift is the ultimate win for an aspiring home owner, with a cash loan from the Bank of Mum and Dad coming in a close second. Know, however, that not all parents have this level of liquidity available – especially if they have multiple children to assist. Gifting or loaning large amounts of money can enhance the risk of conflict in a family, and leave some children with a feeling of perpetual obligation and guilt. When loaning or gifting to your children, it’s essential that everyone is on the same page from the outset. What’s more, a cash gift isn’t necessarily a fast-pass to a home loan. Many banks now look for evidence of ‘Genuine Savings’ – meaning you must provide bank statements showing where your deposit came from. Gifts are fine, providing your child’s spending behavior is in balance with their income.
It goes without saying that a leg-up onto the property ladder is extremely valuable. Even the stingiest savers find it difficult to earn enough to accrue a minimum deposit. A little help from the BOMAD can mean they’re on the road to independence and home ownership faster, without sacrificing too much of their lifestyle while they’re young.
Item 2: Living at Home
Whether your adult child has returned home after discovering how hard it is to save a deposit when paying rent – or they simply never flew the nest – more young people are living with their parents for free!
Children living at home well into their 20s risk more than their sanity. While parents may indeed be helping their kids make a start on savings goals by offering accommodation, food and utilities at a much lower rate than living independently, there’s little room to develop life skills at home. It’s possible that a generation of stay-at-homers may reach their late twenties without ever paying a bill, doing their own laundry or budgeting.
Providing that adult children are not abusing their parents’ generosity, living at home will inevitably bring them closer to saving a deposit. Be wary though – whichever end of the bargain you’re on. The parent must respect boundaries, and the child must be grateful and committed to saving for a first home.
Item 3: Guaranteeing a Home Loan
Some lenders offer the option for parents to guarantee their child’s loan repayments. While it won’t let them borrow more, it may relieve them of LMI and lower their required deposit.
The major risk of ‘going guarantor’ on your child’s mortgage lies in the potential of your child defaulting on their loan. Many parents choose to guarantee a child’s home loan against their own property’s value, but be aware that a loan default could put the family home at risk. In extreme cases of loan default, the family home may need to be sold to cover the debt of the guaranteed property. Such consequences can put stress on parent-child relationships and encourage unnecessary involvement in the child’s finances. An important question to ask before engaging in mortgage security relationships is ‘when will the guarantee be lifted?’ Often, parental involvement can be relinquished once the secondary loan reaches <80% of the property’s value – which, in Melbourne’s fast-paced market, might not be all that long a period of time.
While your child must still prove their ability to finance the monthly loan repayments from their own income, going guarantor may allow them to obtain finance with little-to-no savings, and eliminate the need for LMI. Their first home loan is likely to be of a lower value than the property against which it is secured. This can save the child thousands and get them into the market much sooner, without having to waste years paying pricey rents.
Our final verdict on the Bank of Mum and Dad? In the right circumstances, it can be the best route to swift homeownership for young people. Whichever way you go, the aim is to leverage your child into the property market sooner. Unless the property market is in downturn, every month your child waits is simply wasted time resulting in a higher debt.
Wondering how involvement from the Bank of Mum and Dad will affect your borrowing capacity? Book an appointment with Hatch Financial Services. We’ll sit down and look at the financial positions of both parent and child, and work out the best way to utilize those all-important BOMAD dollars.