Written by Michal Lancemore
The Bank of Mum and Dad (BOMD) is officially one of Australia’s biggest property lenders. It is estimated to be one of the top 10 sources of residential property deposits. In a nutshell, it’s the unregulated lending of funds from parent to child to provide a deposit, cash, equity and/or guarantor in order for them to gain access to the property market.
It has become an increasingly common conversation I am having with clients who wish to assist their children. It has exploded in recent times and ironically, could even have played a part in the recent house price surge (ie mum and dad giving their first home buyer a leg up, increasing demand when normally they would be priced out of the market).
As a parent, I am staring down the barrel of financially assisting three daughters in some way when they try and break into property (let’s not even mention potential weddings). So, I get it. We want to help our kids in any way we can.
But not to our own detriment please.
As a financial planner and with the client in mind, there are a lot of risks to consider when helping children financially. First and foremost, my primary concern is the financial well-being of my client. I do not want my client forgoing their financial freedom by helping their children. I do not want my client placed under unnecessary stress or forgoing their own potential wealth accumulation for the sake of a generation that is used to getting things sooner rather than later.
If you’re committed to assisting your child/ren, then here are some risks to consider depending upon how you choose to help:
You provide a gift or a loan
- When providing funds, there needs to be clarity over whether it is a gift or a loan. If it is to be a loan, be clear what repayments are to be made and when. Is interest to be charged? At what rate – this can be a win/win situation if you charge the average of savings and mortgage rates (ie 4% pa)? If it is a loan tax may be payable on the interest given it is assessable income.^
- If it is a gift, it may impact your entitlement to the age pension or other Centrelink benefits. Age pension assessments limits gifts to $10K per annum of a total of $30K over 5 years. And this is assessed five years prior to you even applying for age pension entitlements.
- Can your child live with you rent-free in order to accumulate sufficient savings?
- Can you assist in other ways to reduce their expenses for the purposes of saving faster for a deposit?
- It is strongly recommended that you structure any material financial assistance as a loan (in writing) to help resolve any subsequent dispute, bankruptcy or relationship breakdown.
You provide a bank guarantee
- Is your relationship strong enough to withstand any strain that may arise from offering the guarantee?
- If your child cannot meet the mortgage repayments (and let’s face it, many maximised their capacity before interest rates started rising 12 months ago), the responsibility for the loan then falls to you. And if you can’t meet the mortgage repayments, then your home is at risk of being sold to recoup the debt.
Are you in a financial position to provide an early inheritance in lieu of a bank guarantee? (see below)
You provide an early inheritance
- Will you be in a position to offer the same arrangement to other siblings when they are ready to invest?
- Do you assist all of your children to the same level or each according to their individual needs?
You can use your Wills to “balance out” your estate between siblings. You need to specifically express your wishes and why’s of doing so. *
Final thought: every parent wants to be in a position to help their child. However, it is my job to ensure you have enough to meet your own goals and objectives before assisting anyone else, otherwise- catch 22 – you may end up the financial burden of your child!
^seek advice from an accountant. If you don’t have one, call and we can refer you to one.
*seek advice from an estate planner. If you don’t have one, call and we can refer you to one.