Risking retirement: Why the bank of mum and dad don’t expect to be paid back

A chunk of money to help buy a house is the financial gift of a lifetime. But a growing number of parents accept that they won’t ever be paid back.

The bank of mum and dad might be one of the biggest mortgage lenders in the country, but they are increasingly giving up hope of ever being paid back. 

The term, used to describe the financial support provided by parents to their adult children, especially when it comes to helping them buy their first home, can take various forms.

From private loans, monetary gifts, co-ownership arrangements or parent guarantor loans, the bank of mum and dad is a blessing for those able to afford to help their children into the property market. 

Parental support

The bank of mum and dad is responsible for approximately $35 billion annual in property purchases in Australia, according to recent data from Digital Finance Analytics. This is an eye-watering figure that shows just how tough it is for first home buyers to get into the property market. 

While the money used to be offered as a loan to help their kids get into the property market is now increasingly being handed over in a lump sum given without the expectation of the money being paid. 

First home buyers usually opt to live at home with their parents, curb their spending on eating out and take on a second job to bolster the size of their deposit.

But without a little help from their parents, getting into the property market given that the median price for a home in Australia is $790,000 is nearly impossible on an average salary these days.

Mortgage brokers report that parents are providing bigger pots of money for a deposit in a clear sign that many parents view home ownership as so unattainable that the only way to get their children into the property market is to provide a financial gift to make it happen. 

Pot of money 

Perth-based Mortgage Choice broker Shannon Hassett notes a huge uptick in the number of parents providing generational wealth to their adult children over the last 12 months as house prices continue to grow. 

“We often work with parents with teenage kids in high school who want to learn how to help their kids by buying an investment property now to be able to hand over to their kids later,” Hassett says.

Experts say parents often buy investment properties for teenage children that they will eventually hand over. Picture: Getty

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“We’re definitely seeing early inheritances coming from wealthy from parents for their kids to purchase their first home as well. We’re seeing parents gift growing amounts, anything from $50,000 to $1 million dollars being given to their kids to get into the property market,” Hassett says.  

In one recent case, she recalls an adult child being gifted $2 million for a deposit on their first house. 

Earn interest 

Hassett advises first home buyers receiving a financial gift from their parents to make sure they keep the money in a bank account that’s earning interest while they search for the right property to purchase. Any interest above 4.5% is a good rate in the current market, which will allow the money to grow over time thanks to the wonders of compound interest.

“Some lenders will require buyers to hold the funds in their own name for a three-month period for it to be considered genuine savings, while other lenders allow them to use the money straight away,” she says.

Lenders generally need proof that buyers have savings and assets even if they are using a guarantor. Picture: Getty

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Highfield Private group director Steven Tropoulos often works with younger clients receiving financial help from their parents, whether through lump sums drawn from superannuation or savings, or by accessing equity from the family home. 

He says: “In some cases, parents are structuring their financial contribution to secure a share in the property, with the understanding that they’ll be repaid down the line when their children’s financial position improves.

This approach can provide a balance, allowing parents to assist while also safeguarding their own retirement plans.” 

Word of warning 

While parents might have the best intentions to help their kids, before lending money to family, it’s important to seek out some legal advice. 

Providing a lump sum payment for a property or acting as guarantor can derail a parents’ own retirement plans, so it’s important to get the agreement clearly mapped out on paper after speaking with a lawyer and also potentially a financial adviser. 

Tropoulos warns parents not to financially overextend themselves when helping their children into the property market.

“While the intention is always to support, it’s vital that parents first assess what a comfortable lifestyle and retirement look like for them. From there, they can determine what level of financial support is realistic and sustainable, ensuring they don’t compromise their own future wellbeing in the process,” he says. 

“Stretching their finances too far can undermine their long-term security and, in some cases, result in a situation where the children end up needing to support their parents in the future.”

This article first appeared on Mortgage Choice and has been republished with permission.