As the property market continues to boom, more and more Australians are struggling to get on the ladder, and staggering new research shows that parents are increasingly coming to their aid.
According to new Mortgage Choice research, nearly 60 per cent of respondents were considering gifting or lending their children money to help them buy a home, while 53 per cent said they would go guarantor on a home loan, and a further 45 per cent said they would consider using the equity in their own home to help.
The findings are a stark contrast to November last year, when a survey revealed the “Bank of Mum and Dad” was open for business but was considerably less generous with financial assistance than it was before Covid-19. Finder’s 2020 survey found that fewer parents were providing a financial crutch to their kids and those who were, were providing a lower level of assistance, particularly on the more expensive items in life, revealing that only 44 per cent of parents were subsidising their adult children in some form, compared with 54 per cent of parents in 2019.
The findings come despite experts warning that the “Bank of Mum and Dad”, which is Australia’s ninth biggest mortgage lender, could be perpetuating inequality and fuelling the housing market crisis as more and more young people are left behind.
Susan Mitchell, Mortgage Choice chief executive officer, said buying a home has become an intergenerational family affair. “As parents, we’re used to doing what we can to help our children achieve their goals,” she said. “In a housing market recording such phenomenal growth, it’s perfectly understandable that parents look for ways to help their kids buy a home, whether that be as a guarantor or providing them with a gift for their home loan deposits.
“The average dwelling price in Australia’s capital cities, in particular Sydney and Melbourne, are prohibitive, which means those looking to buy their first home will need all the help they can get.”
Mitchell said that while some parents may want to gift or loan their children the money, there are other alternatives that can be better options and still help children get their foot on the property ladder.
“Property equity is a tool parents can use right now to help their children realise their homeownership goals,” she said. “Mortgage Choice application data revealed that 6.14 per cent of first home buyer home applications used a guarantor in 2020. Getting into the market with a guarantor loan means that parents won’t have to give their kids money. Instead, they can use the equity built up in their home.
“Being a guarantor on a loan eliminates or reduces the amount the child needs to raise for a deposit and can get them into the market sooner. Instead, the guarantor uses the equity in their home as additional security against the child’s loan. This can also help reduce the Loan to Value Ratio, to reduce or remove the costs of LMI [Lenders Mortgage Insurance].
“Be aware that going guarantor is not a straightforward process. Borrowers and their guarantors should seek legal advice to ensure they understand their obligations and consult a qualified mortgage broker to ensure the loan is structured to minimise risk. Brokers have helped many parents go guarantor, so they are well placed to advise you and your children of all that is involved.”
If you are considering opening the “Bank of Mum and Dad”, experts say there are a few key things to consider beforehand. Firstly, whether it is a gift or a loan and the details of the repayment plan, the interest rate and what would occur if your child defaults on their loan to you or the mortgage.
Secondly, if it’s a gift, you will need to assess if it falls under the threshold permitted under the Age Pension income and assets test. The limit sits at $10,000 annually and a maximum of $30,000 over five years. If you exceed these limits, any extra amount will be regarded as an asset for five years after it has been gifted, meaning that even though you gave it away, it’s still counted as something you own.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.