While the so-called bank of mum and dad – aka “the bank” – is not a new lender, it’s centrality to Australia’s housing market has exploded in recent years. In late 2023, a Jarden survey estimated it to be worth over $2.7 billion, tapped into by as many as 15 per cent of mortgage borrowers. Enabling more younger (particularly first) home buyers into the market, and to reap the long-term rewards associated with property ownership, is seen as a positive. But at what cost: both for aspiring property buyers and their unofficial lenders?
Ill-considered strategies
Like all lenders, of course, there are multiple options available to “the bank”, including gifts, advanced inheritances, loans, mortgage guarantees and co-ownership. Some are less well-known than others, making them easier to overlook. All have their own merits and drawbacks. How well are these being weighed up, though? To what degree does the current housing crisis provoke a sense of urgency to dig deep, forgoing proper due diligence?
Lack of documentation
“It’s a family matter – why do I need to put it in writing? … But I’m happy to help!” Sound familiar? As advisers, it’s our duty to mitigate risk. Part of which means documenting everything. Hence, anyone with access to professional advice is likely to draw up some form of written agreement. What about those who don’t? Are they even aware of the dangers of not having a paper trail?
Relationship tensions
Money is often the cause of relationship tensions; the more money involved, the greater the potential for tension. Couples may disagree over how, and even if, to support their adult children’s property ambitions. This complexity multiplies where stepchildren are involved. Advanced inheritances can generate conflict around perceived “fairness”. Do siblings receive equal amounts? Even when time lapses see the dollar devalued and property prices soar? Or their incomes are vastly different? Do gift recipients receive less in the will, or nothing? While funds typically change hands when everyone is on good terms, what happens if there is a falling out? If the buyers split up, how are matters to be settled with “the bank”?
Financial costs
The actual cost to “the bank” can vary greatly, depending on what support is provided and how circumstances change over time. Loans towards the deposit may not be repaid in full, meaning the loss of both the principal amount and interest earnings. Access to a full or part pension may be impacted. Mum and dad lenders who stipulated fixed interest levels when official rates were at record lows would now be hurting (unless that rate had been pegged to RBA movements). Retirement earnings may be impacted if assets are sold to provide the funds, especially if sold on the cheap or in a market lull.
Forced sales, bankruptcies
The worst-case scenario is that one or both parties go broke. Should first home buyers find they can’t afford to retain the property, a forced sale occurs, potentially at a loss, leaving them worse off financially than before they started. Where do they turn for help? Back to “the bank”. For parents who underestimated their retirement funding needs or subsequent illness or other factors increase their expenses, they, too, may find themselves forced to sell. Should the children’s mortgagee take possession and call in the guarantee, both generations may suddenly find themselves homeless. If “the bank” operates a business, its cash flow and even ongoing viability may also be affected – potentially cutting off their income and retirement nest egg in one hit.
Lifting the veil
I’m not necessarily advocating for or against the bank of mum and dad. There are obvious benefits to younger generations being supported onto the property ladder. And many people are happy to assist their kids – even considering it as part of their legacy. What is needed, however, is more robust discussion of the issue; greater awareness of the various options, potential drawbacks, and risk mitigation strategies available.
Ultimately, only time will tell whether this lender of last (or, perhaps in some cases, first) resort is a sustainable tool in tackling the current housing crisis, or if it is merely laying the foundations for the next one.
Helen Baker is a financial adviser and author of “On Your Own Two Feet: The Essential Guide to Financial Independence for all Women”.
Perhaps we can think more broadly about this. If Mum and Dad each had a personal longevity plan they could make informed decisions on whether one or both would choose to remain in paid work longer. This could offset any impact on their own finances. Alternatively (or additionally) they could provide some full-time grand-parenting to free the birth mum (usually) for paid work-adding to her super and financial resilience (not to mention her overall wellbeing) and supporting mortgage repayments.
By now Mum and Dad are increasingly likely to outlive their birth life expectancy, so they might feel that a social contribution responding to this longevity bonus was appropriate: they could be already providing this by working and not requiring a new house, augmenting national productivity and at least for a period reducing the pressure on prices from having to house new Australians. The government could also broaden the scope of home equity release to incentivize Mum and Dad to borrow against their own home at low interest rates and provide other incentives for them to remain financially productive if they can.
A genuinely holistic strategy by government to steadily increasing longevity, including properly educating everyone from midlife about their likely longevity bonus, would support real community and personal dividends. Super funds could take on the education task with no compliance worries, and would build relationships with their members and their partners much more easily than competing on financial advice.
“I am not necessarily advocating for or against the bank and mum and dad”
Sorry Helen but I think you are. Yes there all the quasi-legal issues which should be addressed by written agreements. And the driving force of all of this is the bank and mum and dad is worried about their grandchildren, not their children. And yes I agree that some mum and dad’s do you charge into these arrangements without serious consideration and legal agreements
What I’d like to see is more blame be directed at John Howard. In the late 1990s it was he who discounted the capital gains on investment properties and businesses which subsequently made negative gearing of property such an attractive concept. In my view it’s one of the significant contributors to our current housing crisis.
The other cause to my mind is that neocon concept where the Commonwealth ceased providing funds to the states to build affordable housing, from round about the early 90s.
Blaming Howard for Labors current mess? What a typical lefty comment , hilarious
The bank of mum and dad need not involve cash at all. A guarantee of the deposit against mum and dad’s home equity will suffice. I have done this for my 3 kids, all working and all with sufficient savings they can use as a buffer in the event something unexpected happens. We do this for 24 months at which time they renegotiate the loan with the equity accrued and their buffer still in place. Mum and dad are off the hook, kids have a house and a mortgage. It’s a good solution with the lowest risk for us.
very tricky one . Popular authors Stanley and Danko says giving money to adult children will result in them earning less in thier life time BUT thats when the price of a home was around 3 times earnings now its around 10 is there any other way?