The Bank of Mum And Dad (BoMaD)
Many customers tell us how they wish they could do more for their kids and grandkids. Whether it’s to pay for educational expenses, help out with mortgage payments or contribute to a first home buyers deposit, many want to be the ‘bank of mum and dad’ and give to their family.
The ‘bank of mum and dad’ or BoMaD ranks as Australia’s tenth-largest lender according to the Australian Prudential Regulation Authority, accounting for more than $29 billion in funding for kids.
Typically funds are drawn from savings, with some dipping into their superannuation, often depleting long term retirement funding.
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Frequently Asked Questions
Using a Household Loan to be the bank of mum and dad
It’s important to ensure that intergenerational wealth transfer is responsible; you must make sure your own needs are met before trying to assist your loved ones. However, if your retirement funding needs are in hand, you can use a Household Loan to contribute to a first home buyers deposit, help children with mortgage expenses or cover the costs of education. This approach enables you to help children and grandchildren when they need it most and use your Household Capital™ to help the next generation build theirs. Try our equity calculator or call us on 1300 622 100 to see how using your Household Capital could improve your retirement income so you can stay safe and Live Well At Home.
What other strategies can I use to be the bank of mum and dad?
Traditionally, parents helping their children have generally used three strategies, each of which has its downsides.
The most common strategy is for parents to raid their retirement savings, which can wreak havoc on future retirement plans. It might leave you with reduced income or mean your retirement nestegg is not there for you when you need it.
The second strategy is to be a mortgage co-borrower, which means you’re on the hook for mortgage repayments if your child misses them.
The third strategy is to be a guarantor on a mortgage, which can constrain your own ability to borrow and may put your property at risk if your child defaults on their mortgage repayments.
A Household Loan removes these risks because it doesn’t have to be repaid until you leave your home or it's sold. You could even agree a regular repayment schedule with your child; payments could be used to make interest-only repayments on your Household Loan, or agree a lump-sum repayment may pay off your Household Loan at a future date. There is no penalty for repayment of your Household Loan at any time.
A Household Loan enables you to help your children and grandchildren when they need it most and use your Household Capital to help the next generation build theirs.
Can being the bank of mum and dad affect my pension?
Before you give your kids money to buy a house or pay education expenses, be clear whether it’s a gift or a loan. If it’s a gift and you receive the Age Pension (or other benefits), you must declare it to Centrelink. The annual limit for gifting is $10,000 (or $30,000 over five years depending on your situation) – anything above that may affect your entitlements for up to five years.
If it’s a loan, it can still impact your pension entitlements. If you lend your children money instead of gifting it, that loan will be treated by Centrelink in the same way as most other investments, with a deemed rate of return – even if your kids weren’t expected to pay you interest or stop paying the interest you agreed.
Importantly, the impact of the loan on your Age Pension isn’t limited to five years, but for as long as the loan is outstanding.
It can also be advisable to provide your kids or grandkids a statutory declaration stating whether it’s a gift or a loan and, if it’s the latter, the terms. We require legal advice for all Household Loans; any terms agreed by you and the recipients should be documented as part of this process. In matters of money, emotions can get the better of us. Your Household Loan must be right for you as well as the right thing to do by your kids. Being clear and upfront will keep everyone secure.
What are the tax implications of being the bank of mum and dad?
While you should get advice from your accountant specific to your circumstances, there could be implications if you lend money, depending on whether interest is payable. If that’s the case, that interest could be considered investment income and therefore taxable in the hands of the lending parent.