Why $200,000 is a regular payment from ‘Bank of Mum and Dad’

The so-called ‘Bank of Mum and Dad’ is often parting with more than $200,000 to get their children on the property ladder, a landmark new survey finds.

The housing market is increasingly difficult to enter and buyers whose parents help them are making it even more competitive.

For all the attention it gets, the “Bank of Mum and Dad” is something we know very little about. Now, at last we have some facts.

UBS has run a survey across Australia into what some people like to call “the nation’s fifth biggest bank”.

Though it has not quite nailed the scale of activity on the ground, UBS does offer some important signals. About 40 per cent of all Australians are “involved” here, while it discovered that “payments to children are regularly $200,000”.

The figure might well be jolting – but if you think about it, the average home in Sydney and Melbourne is now in the region of $1m, and the banks are demanding a 20 per cent deposit.

Something that also stands out as a fascinating insight is that the Swiss bank discovered a major discrepancy between what parents said they gave to their children- and what children said they received.

What does this discrepancy mean? Let’s assume the parents are not lying about how much of their life savings they handed to their kids.

UBS strategist Richard Schellbach says: “It’s very interesting: The parents may be referring to what they gave all their kids in total, but at the same time there is clearly an embarrassment factor on display – adults may be uncomfortable talking about how much money they got.”

The survey shows that the bulk of transactions at the Bank of Mum and Dad relate to home purchase costs; 28 per cent of help was related to mortgage payments, 25 per cent went to help with the purchase of a home, and a substantial remainder is related to that rubbery financial concept of “living expenses”.

The so-called Bank of Mum and Dad can face big outlays to help get children on the property ladder.

If you are considering become active in the Bank of Mum and Dad, it might be reassuring to know that $200,000 might be the number cited by up to a third of the UBS survey respondents, but the rest dealt in smaller numbers – as low as $25,000 – while an amusing proportion of about 2.5 per cent would “rather not say”!

Some other research in this area has also dealt in more modest numbers. A survey last year from the less well-known Compare Club group suggested the average gift from Australian parents “can exceed $75,000” and that 40 per cent of all parents were considering a similar size gift to their children.

Certainly, there are very few families where the issue of “helping out with the house” will not arise and, if the UBS survey is anything to go by, we are talking about substantial sums of money

The difficulty for parents and their adult children is that the entire nature of this transaction has evolved from something that would be nice to do, to something everyone is obliged to consider.

Look at it this way. When we bought our first home in 1994 for $176,000 – my salary was $50,000 – the rule was a loan could be up to 3.5 times salary and it just so happened the house was roughly 3.5 times my salary. Now, if one of my kids in the future wants to buy that house, it is still standing there, virtually unchanged. It is currently valued at about $1.3m. So, to buy on the same terms, three decades later you would need an annual salary of $371,000.

There’s the rub – your children cannot buy a house unless they have huge salaries. Meanwhile, most older Australians have benefited from the property boom and accumulating superannuation.

Schellbach also points out that almost half of the money transfers from the Bank of Mum and Dad are on “living expenses”, which he suggests points to a little known “boomer annuity stream” that is common beyond the confines of the housing market.

For the most part though, the Bank of Mum and Dad deals in money for buying a home – and advisers and lawyers have been trying for years to find a framework that would be seen as “prudent” for all involved. But the issue is that family money is not corporate money and few people can be as hard-nosed about their family as about everyday dealings.

Lawyers suggest that formalised “loans” can be much better than gifts when it comes to helping your children, as there is then a clear plan about who gets the money and on what terms. They say everything relating to this family loan should be put in writing to avoid unintended consequences such as a partner or spouse getting half the property should the younger couple ever break up.

It is probably a lot easier to advise on this sort of thing than to ­actually sit down and draw up agreements. You wonder how many parents actually pursue legal agreements with their own children. It might be time for UBS to do a wider survey.

James Kirby hosts the twice-weekly Money Puzzle podcast

Originally published as Why $200,000 is a regular payment from ‘Bank of Mum and Dad’