If I asked you to name Australia’s fifth largest home loan lender for first home buyers you’d probably say one of our big banks. But you’d be wrong. In fact, the Bank of Mum and Dad claim this title – with parents collectively lending a total of $65.3 billion to help their grown-up children into a home of their own. Worryingly, seven out of ten don’t expect to get their money back.
Research by comparison site Mozo confirms what many parents already know – that “Mum and Dad lenders” are a major player in the Australian property market.
Surprisingly, 41% of parents are dipping into their own pocket to contribute towards their child’s first home deposit.
This is an area where good intentions don’t always have a positive outcome, especially for parents in or approaching retirement.
Among those parents who lend a hand, almost seven out of ten (66%) are drawing on personal savings to help out with their child’s first home purchase. One in four are cutting back spending, and 13% are using home equity to help an adult child into a home of their own.
The worrying aspect is that many families with kids old enough to buy a first home, aren’t rolling in cash. So parents need to be aware of pushing themselves into financial stress to help out their children.
That said, I’m a big fan of home ownership, and it’s only natural to want to give your children the best financial start possible. With planning, it can be possible to reach a compromise that suits everyone.
Life expectancy is increasing, and if you’re a parent there’s a fair chance your children won’t inherit your wealth until they’re in their 60s. That’s not much consolation when they’re struggling to buy a home today.
So if your retirement plans are secure, and you have some spare cash, instead of investing it in a savings account where the average ongoing return is a meagre 1.82%, an alternative is to lend the funds to your kids at a rate between what you would earn on a term deposit and the interest they would pay on a mortgage. You both win!
It’s sensible to have the arrangement legally documented, but if it works, you’re not compromising on cash returns, and your child is benefiting from a discounted lending rate to build wealth through property, giving them a great head start in life.
Most importantly, be sure your well being in retirement won’t be compromised by offering a financial helping hand to your adult children.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
Whether you’re looking to renovate, invest or pay off something big, home equity can be a valuable resource when it’s used correctly.