Bank of Mum and Dad – 5th Major Lender in The Market
CBA, Westpac, ANZ and the NAB have a new player in their banking and finance segment to contend with. It’s been said that the ‘Bank of Mum and Dad’ is now the fifth biggest lender in Australia. With stepping onto the property ladder now out of reach by so many young people the average amount parents are lending to their children now sits at $67,000.
One of the main features to the borrowers being that unlike many of the other lenders it very rarely requires a repayment back. So as property prices increase and hurdles for income and deposit requirements tighten many young home-buyers turn to their parents for help getting into their very first home.
Assistance can be provided in 3 main ways and these include:
- A gift to help with the deposit or even providing their own home as security to kick things off (which can save thousands in lenders mortgage insurance).
- Providing help with extra repayments and
- In a very small percentage of cases buying the property outright for them.
Whilst it is admirable to see parents supporting their children to secure the home of their dreams the financial impact it has on the contributing parents is often overlooked. It’s not all rainbows and skittles after the dust settles.
In simple terms the effects in worse case scenarios if the kids default are that ‘mum and dad’ either have a financial cost to pay or in extreme cases have to sell their own home to foot the bill.
The other major impact on mum which is often overlooked is that their income is diverted away from channelling much needed funds into super for retirement or paying down their own consumer debt which can leave the ‘Bank of Mum and Dad’ not so viable to meet their own overheads in the long run.
It is important for parents to seek legal advice before proceeding with any financial pledge to their children so they fully understand what they are committing to and the ramifications should things go wrong.