Money tips for the Bank of Mum and Dad to avoid a nasty surprise

Many parents help their children buy real estate, but their financial generosity can come unstuck. Here’s how to prevent pain.

Many parents are happy to help out financially with housing. Picture: iStock

It ranks among Australia’s 10 largest lenders, but unlike other financial institutions this bank does not come with government guarantees or strict regulations.

The Bank of Mum and Dad is increasingly used to help first home buyers get a foot in the real estate door, and while many parents are happy to assist there are also concerns around senior Australians being exploited financially.

And, unlike CBA, Westpac and other major lenders that would most likely be protected by the government if there was a chance they could go belly-up, the Bank of Mum and Dad certainly can go broke through poor financial decisions or bad luck.

It has been reported that a majority of first home buyers today receive some form of parental financial help such as gifts, loans or allowing adult children to move back home to save a deposit quickly.

Financial elder abuse is also growing as our population ages rapidly and some family members want inheritances sooner.

While most mums and dads are happy to help out if they can, others feel pressured to do so and a handful feel threatened emotionally. There also are issues of fairness that can haunt family situations if one sibling gets more help from parents than others.

Then there is the money mess that can emerge from relationship breakdowns.

If the Bank of Mum and Dad doesn’t get their structures right, there’s a chance that a relationship break-up can see a huge chunk of the money they’ve given going to their child’s ex.

People don’t have to be married to be entitled to half their partner’s assets in a break-up, just living in a de facto relationship for two years or more.

There is also the potential problem of deadbeat kids, who borrow money from parents but don’t pay it back, or who get mum and dad to be guarantor on their mortgage then let them down by missing repayments and putting the bank on their parents’ backs.

Parents going guarantor usually put part of their own house up as security for a child’s home loan, which is why mortgage experts always recommend they seek independent legal advice when setting up such an arrangement.

When the Bank of Mum and Dad help, it also should be clearly explained whether they are giving money or lending money they expect to be repaid – and communicated to siblings who may be surprised or annoyed later.

Sometimes parents think it’s a loan and kids think it’s a gift, or vice versa. A formal contract clarifies things.

Experts say legal advice is valuable when lending money for housing. Picture: iStock

Parents have trillions of dollars to transfer in the coming decades as the massive wealth of the Baby Boomers passes down to their children and grandchildren.

There’s nothing wrong with parents helping their children get into housing, especially if they are financially strong enough to withstand any nasty surprise. They just need to think of all the potential consequences, and get legal advice where necessary.

However, parents who themselves are struggling financially should never feel pressured to help out, because they don’t have the luxury of time to recover from a financial collapse.

Originally published as Money tips for the Bank of Mum and Dad to avoid a nasty surprise