Conversations about the bank of mum and dad are tearing families apart

When I bought my first home in 1980, the price was roughly twice my annual salary as a junior psychologist. These days, it’s estimated to be 9.9 times the median household income in Melbourne and a whopping 13.3 times the median household income in Sydney. That’s brutal.

No surprise, then, that so many first home buyers are turning to the bank of mum and dad.

Australians trying to buy their first home are increasingly relying on the bank of mum and dad.Credit: Istock

Ideally, parental financial support should be joyous. What greater pleasure than helping your children onto the property ladder? But the downside is increasingly showing up in psychotherapy and counselling rooms. My colleagues report three perilous psychological themes: inequality, power and conflict.

One described the effects of inequality: young clients are experiencing deep feelings of envy and jealousy towards friends who have parents who can help. It’s poisoning their self-esteem and those relationships. “It’s a class issue, even though we don’t like talking about class differences,” he said.

The flipside is parents feeling like shameful failures because they’re unable to financially assist their children.

Another variation is when financial support between siblings is unequally distributed, spawning resentment. In one case, the youngest child felt she should receive special treatment because her older siblings were already married and owned homes. The older siblings, however, viewed this as a sense of entitlement typical of youngest children. Needless to say, the parents were in a quandary and Sunday family lunch hasn’t been quite the same.

A second presenting problem cluster is the abuse and manipulation of power by holders of the purse strings. I’ve heard cases where parents were asked to sign on as guarantors for an adult child’s loan. Their response was positive, but only if they had the final say on what was purchased and where. Another parent presumed management in their adult offspring’s purchase because “he’s not good with money”.

The problem is that these manipulations can perpetuate inappropriate parent/child dynamics. The parent maintains unhealthy control over the child, hindering their growth towards independence. And the child gets locked into feelings of obligation, and its toxic emotional cousin, resentment.

For example, they might feel they have to visit more often than they want, for fear of endangering the financial assistance they need. They can get frozen in a childlike state, fearful of “getting into trouble with mum and dad” if they do the wrong thing – even when they’re well into adulthood.

One psychologist I spoke with put it this way: “It’s not the money per se that’s the problem, it’s what it represents. If there are pre-existing problems in the parent/child relationship … money can exacerbate them.”

A third set of psychological issues arises from the conflict triggered by unforeseen circumstances where a renegotiation of the deal is required.

A parent might have underestimated the amount of money they need due to an unexpected illness or job loss. Life happens. The parent may need all or part of the funds back, which often isn’t possible, resulting in friction.

Even more onerous, parents have loaned funds to a child and their spouse, then the couple split up and the borrowed funds form part of the marital assets. Try getting your money back in the middle of that divorce.

Another common occurrence is the child assuming the money to be a gift, while the parents understood it to be a loan. Arguments later arise due to differing expectations and assumptions: ambiguity plus money equals animosity.

What greater pleasure than helping your children onto the property ladder?Credit: Arsineh Houspian

These are not outlier examples. Studies show borrowers using the bank of mum and dad are three to five times more likely to default on their loans. This is the stuff of long-term family breakdowns. And all because mum and dad thought they were doing the right thing.

So, how to avoid these problems? Much of the advice comes, not surprisingly, from family lawyers and mental health professionals. If possible, hand over the loot as a no-strings-attached gift rather than a loan. Expectations on both sides are then minimised, reducing the chance of misunderstanding and disappointment.

If acting as a guarantor, seek independent legal and financial advice so you’re clear on what you’re getting into. And – similar to advice given to investors – limit your exposure to what you can comfortably lose.

Finally, put your agreement in writing. Many family members feel uncomfortable doing this, as it suggests distrust or suspicion. But don’t be embarrassed. Have an open and honest conversation about each other’s needs and expectations. Workshop various “what if” scenarios and agree on a plan for them.

Then write up a simple “contract” that specifies all the details: how much is being provided, the terms, and how you’ll handle contingencies should they arise.

The key is to make sure everyone is on the same page.

Peter Quarry is a retired psychologist and writer.

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