Once again, the Bank of Mum and Dad is making headlines. As property prices enjoy a post-pandemic resurgence, an increasing number of first home buyers are being priced out of the market.
While a boon for homeowners, it’s a different story for those trying to get a foot onto the property ladder. According to recent analysis by Digital Finance Analytics (DFA), the Bank of Mum and Dad is now ranked as Australia’s ninth largest mortgage lender, lending adult children an average of $89,000...lending that’s increased approximately 20% over the past 12-months.
How do parents fund the Bank of Mum and Dad and what are the potential repercussions?
Traditionally, the Bank of Mum and Dad has relied on one of the following strategies:
1. Parents raid their retirement savings or other nest eggs, which can negatively impact their retirement plans.
2. Parents act as a mortgage co-borrower, which means they’re liable for any repayments missed by their child.
3. Parents act as guarantor on the mortgage, which can constrain their ability to borrow and may put their property at risk if their child defaults on mortgage repayments.
There is a fourth way.
Using your home equity – what we like to call your Household Capital – removes these risks.
With home equity, the loan doesn’t have to be repaid until you leave your home or it's sold. The loan’s flexibility means your child can agree to a regular repayment schedule, such as regular interest-only repayments or a future lump-sum repayment.
Before you give your kids money towards a home, you must be clear on whether it’s a gift or a loan.
If it’s a gift and you receive the Age Pension (or other benefits) you must declare it to Centrelink. The annual limit for gifting is $10,000 (or $30,000 over five years depending on your situation) – anything above that may affect your entitlements for up to five years.
If it’s a loan, it can still impact your pension entitlements. If you lend your children money, that loan is treated like an investment by Centrelink, with a deemed rate of return – even if your kids weren’t expected to pay you interest or stop paying the interest you agreed.
When it comes to money and our children, emotions can run high. If you use a Household Loan to be the Bank of Mum and Dad, we want it to be right for you as well as the right thing to do by your kids.
Being sure your retirement funding is established before helping the next generation is important.
Our Household Loan enables you to help your children when they need it most and use your home equity to help the next generation build theirs. To see how much home equity you could access, try our easy-to-use calculator.
What are you doing with your Household Capital?
Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable and terms and conditions apply (available upon request). Household Capital Pty Limited is a credit representative (512757) of Mortgage Direct Pty Limited ACN 075 721 434, Australian Credit Licence 391876.