Lending advice for the Bank of Mum and Dad

Experts expect parents to see 2021 as an ideal time to help their children into the market but warn they should not rush into it.

The Bank of Mum and Dad has been getting a good workout as first home purchases surge, and finance experts believe parents will be helping their children into homes even more this year.

Property prices are rising in all states – shrugging off fears from early 2020 that COVID-19 would cause values to plunge more than 10 per cent.

And the latest lending data from the Australian Bureau of Statistics shows housing loan commitments are up 23 per cent year-on-year, boosted by government incentives for construction and first home buyers.

Uncertainty over property prices in 2020 has given way to confidence about 2021, and a fear of missing out if prices rise too quickly.

Buyers agent Michelle May expects parents to see 2021 as an ideal time to help their children into the market.

“The First Home Loan Deposit Scheme has been extended to another 10,000 buyers from October, allowing some first homeowners an opportunity to enter the market with just 5 per cent down and be LMI (lender’s mortgage insurance) exempt,” she says.

Buyers agent Michelle May says written agreements are important between family members.

May says the Bank of Mum and Dad is ranked by finance regulator APRA as Australia’s 10th largest lender, “accounting for more than $29 billion in funding for kids”.

She says parents looking to lend money to adult children for a home purchase should not rush into anything.

“It is extremely important to have an agreement in writing or a contract drawn up so everyone knows where they stand,” May says.

“This agreement needs to detail what kind of lending agreement this will be as well. Will this be a gift? A loan? Or a guarantor situation? An understanding of how this money will be delivered is crucial.”

May says it is wise to consult an expert.

“Getting outside advice to avoid making bad decisions in a volatile market is a good investment,” she says.

And don’t let emotions cloud your decisions.

“Buying a house is a huge milestone for your child and they need to know what the terms are of your arrangement so they know the boundaries,” May says.

“Who will be in charge of how much will be spent and what property will be purchased?”

The managing director of finance broker Financia, Angelo Benedetti, has seen a large increase in applications for guarantor loans in recent months.

“Lenders’ mortgage insurance costs are quite exorbitant and the interest rates are higher (for people with small deposits) so it’s often a no-brainer,” he says.

Record-low interest rates have made property purchases attractive.

“Some parents prefer not to go guarantor and they will lend or give their kids money depending on what the shortfall is.

“Some may say ‘here’s $50,000, pay me back whenever’.”

It’s not just owner occupier homes being bought. Benedetti says parents are helping their children buy investment properties too.

“I personally believe there will be a large influx of parental guarantor loans in 2021,” he says.

“I think it’s going to get more and more prominent because prices aren’t going down and the deposits required are quite high.”

Parents should “understand the ramifications if the kids don’t do the right thing”, Benedetti says.

“Be comfortable with your children’s ability and understanding of the loan process – defaults can cause issue down the track,” he says.

In most cases parents must get advice from a lawyer, Benedetti says.

He always asks parents about their own plans for the next five years, because being involved with an adult child’s loan can affect their own borrowings if the parents plan to sell or buy another property themselves.

GROWTH IN AUSSIE HOME VALUES

Past month Past year

Sydney 0.7% 2.7%

Melbourne 1% -1.3%

Brisbane 1.1% 3.6%

Perth 1.1% 1.9%

Adelaide 1.1% 5.9%

Hobart 0.7% 3.2%

Darwin 2.3% 9%

Canberra 0.6% 7.5%

Source: CoreLogic (data as at December 31)