Home loans and other help from the Bank of Mum and Dad

As more young Aussies are being locked out of the housing market, parents are finding ways to help their kids without sacifcing their retirement savings entirely.

Business is booming for the Bank of Mum and Dad as young adults find it tougher than ever to get mortgages and other loans amid high interest rates and living costs.

But lending – or gifting – cash to kids can be complex, and each family is different.

Many parents are not in a financial position to help. Of those who are, some believe in tough love and no financial leg-ups, while others worry about going guarantor or spreading their generosity among multiple siblings.

Children, too, approach it in different ways, with some too embarrassed to ask for assistance, some not wanting to burden their parents, and others valuing their own financial privacy.

Beyond Bank Australia national operations manager Sophie Scott-Young said many parents would put their children’s financial independence before their own, but some worried it might reinforce bad money habits.

“Neither is right nor wrong so making sure you understand your parents’ thoughts on this will help adult children to frame up how to start the conversation, and the barriers they may need to overcome,” she said.

PROACTIVE PARENTS

Some parents, who can afford it, will approach their children to offer help. Ms Scott-Young said this could be a way of showing how proud they were of their children working hard to get ahead in life, but warned it might not end well if they did it “to rescue them from a situation that they could have avoided had they made different lifestyle choices”.

Beyond Bank’s Sophie Scott-Young says be open about repayments. Picture: Tom Huntley

“Lending them money to buy a car or home that puts them in a situation where they are living beyond their means does not help them in the long run. As a parent you want to help, but if you are feeling the emotional pressure from your adult children to do so, don’t.”

Pepper Money general manager, mortgage and commercial lending, Barry Saoud, said being the Bank of Mum and Dad was a big ask and it was not available to many Australians.

“It’s important to know there are alternative paths to homeownership for borrowers who have less than the traditional 20 per cent deposit and whose savings and credit history may need more consideration,” he said.

Mr Saoud said some lenders could consider options for first home buyers looking to borrow up to 95 per cent of a property’s value using a deposit from sources such as gifts, inheritances or asset sales.

“The path to homeownership might be more accessible than you think,” he said.

Family guarantee loans have surged in popularity in recent decades, with parents using equity from their own home to secure the mortgage of a child or other family member.

SHORT-TERM HELP

Oracle Lending Solutions managing director Angelo Benedetti said family guarantee loans typically ran for about five years, until the home’s equity climbed or the child repaid enough debt to release the parent’s home as security.

“It’s not forever – it’s a short-term approach,” he said.

“Twenty-five years ago I was doing maybe one or two family guarantee loans a year. Now I’m doing four-to-five a week.”

Mr Benedetti said some young adults did not want their parents knowing their financial situation, and family guarantee applications gave parents copies of children’s assets and liabilities and their credit report.

“Children cannot borrow further money without the parents being informed,” he said.

There also were pride issues, Mr Benedetti said.

“A lot are probably embarrassed to ask mum and dad because their parents would not have asked their grandparents for money because it wasn’t the thing to do back then,” he said.

A growing number of parents are helping their adult children buy a home. Picture: iStock

“They want to stand on their own two feet. However, without parents you could be up for large mortgage insurance costs and higher interest rates.

“I suggest that the kids have got to put some hurt money into it. You have to show that you can save. … get that right first.”

Ms Scott-Young said being open and upfront about how parents would be repaid would help prevent fallout from other siblings.

“Show your parents how well you have done to save to this point by spending time putting together your budget and cash flow,” she said.

“Add in personal insurance such as income protection and life insurance, and factor this in to the discussions. As grim as this sounds, it shows you have the maturity to consider all scenarios that may arise during the term of the loan.”

TIPS FOR ASKING

• Do your research first.

• Be able to show a bank and your parents that you have been saving hard.

• Be clear about whether money is a gift or a loan to be repaid or by reduction in a will.

• Regardless of the response, be understanding and grateful.

• Don’t let it ruin a family relationship.

Source: Beyond Bank