The Bank of Mum and Dad has risen in popularity in recent years, with adult children leaning on their parents for support as they save for a house and the future.
Parents are dipping into their retirement funds to help get their children on the property ladder, but it could be to their own detriment.
According to an analysis from the Pew Research Centre, most Americans (64 per cent) think parents should cut off financial ties when their children turn 22, though less than a quarter are actually managing to do so.
Meanwhile, almost half (45 percent) of the adults aged 18 to 29 surveyed said they had received financial help from their parents in the previous year, while six in ten parents with children in the same age bracket said they had helped them financially in that time.
It’s a tricky path to navigate, so before you agree to help your children financially, there are a few things you should consider.
You need to consider not just the savings you have in your bank account, but also how you intend to fund your retirement. Unless you can’t gift the money outright, Dr Gabrielle Parle, a lecturer in finance at the University of the Sunshine Coast, says it’s not time to open the Bank of Mum and Dad.
She says unfortunately some parents go into the agreement unprepared and either find they need funds back from their children sooner than discussed, or find that their children come back asking for more money.
To prevent this, Parle suggests asking yourself a few questions such as whether it is a loan or a gift. If it is a gift, will it come under the threshold permitted under the income and assets test while receiving the Age Pension?
There are set amounts for how much you can gift each year while receiving the Age Pension. The limit currently sits at $10,000 annually and $30,000 in aggregate 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 even though you gave it away, it’s still counted as something you own.
As an asset, it will count in both the assets test and income test, which are used to determine how much Age Pension you will receive each fortnight. Therefore, with more assets in your possession, you could ultimately end up with a reduced welfare payment.
You have to be open to the possibility that your retirement dreams may require some adjusting after opening the Bank of Mum and Dad. Any unplanned deductions from your savings – whether it’s a gift or a loan to your children – could impact the goals you had planned for the next stage of your life.
Diana Saad, a senior financial adviser at BT Financial Group (BTFG), says you must consider what’s of greater value to you – the emotional satisfaction of helping your children or the ability to use your finances without the fear of running out of funds.
“It’s not unusual for older clients to be up the coast one day, and they might have absolutely no plan to buy anything, but they see a cute little cottage on the beach and [decide to buy it],” she says.
“It’s important to think about whether you’re willing to forfeit that flexibility to help your kids out.”
But that’s not the only thing to consider. Parle says although your kids have years to build their savings and reach their goals, if you’re in your 60s, there’s limited time and ways to boost the bank balance.
“Ultimately, the children have time on their side: they are young,” she says. “But once you have reached retirement there is no going back if things go wrong. It could end up being a tragedy for all concerned.”
Opening the Bank of Mum and Dad without a plan isn’t a wise decision. You must be open and honest with your children about what you want out of the agreement, such as when, or if, the money will be paid back.
Having a proper discussion with your child before you lend or gift them money is essential, as is documenting the agreement on paper with the assistance of a financial planner. The written agreement should include details of any repayment plan, interest rate you intend to charge and what would occur if your child defaults on their loan to you or the mortgagor.
You need to also consider if you have other children, will they want some kind of financial contribution to put toward a home loan as well? Even if the other child is in a more solid position financially, they may see it as unfair if you don’t gift them the same amount of money.