The ‘bank of mum and dad’ has risks too

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“I talk with people my age, and the Bank of Mum and Dad is becoming more and more prevalent”: Treasury secretary John Fraser Photo: Andrew MearesBuying a home has become so tough for many young people in the past few years that more and more of them are turning to the “bank of mum and dad”.
Nanjing Night Net

But before parents agree to giving their kids a leg-up into the market – and before the younger generation accepts the help – financial advisers urge both sides to think carefully about the commitment they are making, and its potential risks.

Property is hugely expensive, but that’s not a reason to do something that may cause a family fight about money.

Treasury Secretary John Fraser last month said it was more common for young home buyers to use parental help, which he believes is “a worry” because of how it might deplete retirement savings.

Hard data also confirms the trend is on the rise. National Australia Bank last year said the share of new home-buyers that had some support from family had risen to 6.7 per cent, up from 4.8 per cent in 2010.

However, advisers caution this is not a commitment to be rushed into, no matter how much pressure there is from rising house prices.

Andrew Heaven, an AMP financial adviser at Wealth Partners, suggests parents don’t simply hand over enough cash so that their adult child has a large enough deposit to get a home loan.

He stresses that having a mortgage is a long-term commitment, and it’s crucial the borrower has the “financial maturity” to manage a big debt.

It sounds like tough love, but parents may want to have some strings attached to the money they are putting in, he says, to make sure it encourages the right sort of saving behaviour. For instance, he says they might have a saving plan where they match dollars saved.

“If you’re handing money over, my counsel to parents is to have it linked to a goal or objective. You’re trying to encourage good saving behaviour,” Heaven says.

It may appear hard-headed, but advisers also say it can make sense to draw up a legal loan document, to set out what happens to the money if there is a relationship breakdown.

Guarantor loans, where a parent agrees to pay a loan if the child cannot, are another option. These don’t require dipping into savings, but they also come with risks.

The Australian Securities and Investments Commission’s website MoneySmart also says people should think “very carefully” before becoming a guarantor.

It says to ask yourself if there’s another way of helping out, or how you would pay the debt if needed. It says parents should ask themselves what effect a default would have on their relationship and whether it might be best to just say “no” now, rather than risk this damage.

If you’re someone receiving financial help from a family member, there are also some risks to be aware of. AMP’s Heaven says the big one is a loss of financial independence – something that’s part of growing up.

“If you’re financially beholden to your parents, that is somewhat impeded,” he says.

It’s also worth remembering that buying a property is a decision that can be expensive to reverse, if you change your mind and decide to sell the house.

The “transaction costs” from stamp duty, real estate agents and lawyers’ fees typically add up to about 8 per cent of a home’s purchase price, as a rule of thumb. With prices as high as they are, there is also the risk prices can fall to less than you paid when you bought it.

All of which suggests parents and children should be sure before teaming up to buy a house.

This story Administrator ready to work first appeared on Nanjing Night Net.