Susan Hely FAMILY MONE
SusanHelyhasbeena seniorinvestment
writeratTheSydneyMorningHerald. She
wrotethebest-sellingWomen& Money.Parental loans run into trouble
First home buyers can no longer count on the bank of mum and dad
“They cannot afford to pass money down
the generations now.”
Also with soft house prices, many first-
time buyers prefer to wait, rather than
enter a falling market and risk losing their
deposit. This is despite the availability of
some state-based incentives for first home
buyers, such as those in the Northern
Territory that commenced in May.
Certainly there can be a problem with
propping up your kids to get into property
because they don’t have the discipline to
make repayments on the mortgage. North
says that those who get help from parents
are twice as likely to default in the subse-
quent five years compared with those
who have saved.
“My expectation is that we will see this
trend continuing and it will be the end of
mum and dad. Some 10%-15% of equity
has gone for first property owners who
bought 18 months ago.
APRA is concerned that parents are
being pressured into providing funds
for their adult kids, which can create big
financial liabilities for them in their retire-T
he bank of mum and dad is under
threat. Ranked as one of the top
10 lenders in Australia, based on
figures from the regulator APRA, reliance
on the bank of mum and dad (BOMAD)
became widespread for first home buyers
in a rising market.
A year ago as many as 60% of first home
buyers were getting help from their par-
ents, according to Martin North, founding
principal of Digital Finance Analytics.
His research revealed that this equated
to 22,000 first home buyers.
But this rate has since plummeted to
20%. Over the same time, the average
amount that parents cough up to help their
kids dipped from $88,000 to $75,000.
The bank of mum and dad faces tougher
prudential controls amid concerns that
careless lending could endanger not only
the financial wellbeing of the borrower
(the kids) but also the lender (the parents).
A few years ago, banks didn’t look too
closely at a one-off contribution from the
BOMAD. It was counted as part of the
deposit and banks simply required a letter
stating whether it was to be paid back,
either partly or in full, or if it was a gift.
But lenders have woken up to all the
consequences of a loan from the BOMAD,
says North. They are reluctant to lend,
and a “seagull” payment is not regarded
well, compared with a record of regular
savings over time.
First home buyers with a BOMAD loan
that makes up a sizeable part of the deposit
find that some banks won’t take it into
account at all, scuppering their plans to
buy a home. The banks tell them to come
back when they have saved more from their
own income.
There are other forces at work, too, says
North. “Parents are more concerned in
a falling market about the equity in their
own property, and whether it will erode,
when facing retirement.”
He says the parental “ATM” has run dry.ment, particularly if their kids’ relationship
breaks down or they fall behind on their
mortgage repayments.
There are a number of lawsuits by par-
ents who have been disadvantaged by
bankrolling their children without using
lawyers or understanding the terms and
conditions in the contract.
If you do still want to lend to, or go
guarantor for, your adult kids, under the
Banking Code of Practice that commenced
on July 1 you can expect to face more scru-
tiny from banks. You will need to provide
more information about your awareness of
responsibilities and how the arrangement
will affect your own finances. For example,
you will need to show you obtained legal
advice or reviewed the documentation
setting out the terms and conditions.
Certainly, parents need to do their sums.
North says that instead of a big lump sum,
ongoing support may be better.