The real cost of getting your house deposit from the Bank of Mum and Dad
More young Aussies are turning to their parents, appropriately dubbed the Bank of Mum and Dad, to help secure equity for a first home deposit, and financial advisers are split on the growing trend.
For some, the lucky few, the money for the deposit is a gift. For others, it's a loan, with parents offering to match their kid's savings or covering the deposit in full.
Parents are forking out an average $250,000-$300,000 to help their children afford a home deposit, according to retirement funding provider Household Capital's chief executive Josh Funder.
"For a lot of Baby Boomers they enjoy such great longevity that their children don't get to enjoy their wealth until they are old themselves," he said.
"Parents aspire to be the Bank of Mum and Dad and provide financial support to their children. But intergenerational wealth transfer needs to be responsible. Boomers must make sure their own needs are met before trying to assist their loved ones," Funder said.
Financial adviser Hugh Robertson said his Baby Boomer clients get "tremendous satisfaction" from this new trend of wealth transfer.
"A number of our clients want to help their kids now when it will add the most value to them, whether that be helping them pay down home loan debt, assisting in buying a family car, holidays away or the school fees. This gives our baby boomer clients tremendous satisfaction to see their wealth put towards something so available to them - their family," he said.
"After some thorough financial planning the client knows they will not run out of money and therefore have peace of mind they will be okay, and are immensely proud to be able to help their children and provide a family legacy of providing for the next generation."
However, financial adviser Troy Theobald said Boomers are starting to feel the pinch.
"Baby Boomers are dealing with their ageing parents needing to go into aged care and also their kids not being able to afford housing and they are also becoming grandparents themselves," he said.
That said, he doesn't see any issue with parents assisting their children with home deposits.
"If parents are in a position to help then it is probably the greatest thing they can provide for their kids beside education," Theobald said.
Not everyone will be in the position to fork out a home deposit for their children, and as financial adviser Chris Carlin warns, not all experiences with the Bank of Mum and Dad will be positive.
"Most of my examples of using the Bank of Mum and Dad have been quite negative, not so much from a financial perspective but from an emotional and relationship experience," Carlin said.
"Upon getting the arrangement set up, there is quite a lot of 'pressure', whether perceived or actual, from the parents to the children to pay off the loan as soon as possible. Simple pleasures like a weekend away or a night out at the dinner can cause considerable angst and anger as the 'children' don't want to feel like a child again."
Theobald has seen 'the Bank of Mum and Dad' open its cheque book as recently as yesterday.
"We had younger clients in yesterday that are paying $650 a week in rent, they both work hard but it is hard to get ahead and build that deposit. The home loan they would look to take out would only be an additional $380 a week. In their instance there was a parent that was willing to provide the deposit," he said.
Theobald said the new trend had been spawn from decades of low interest rates and people gearing their investments to the max, locking younger generations out of the property market with high prices. "The need for this is more out of necessity," he said.
"We have seen low interest rates that have allowed Australians to borrow more to buy more housing, which in turn, pushes costs up. Negative gearing allows them to buy additional properties which forces prices higher again.
"This is a generational issue. There is now a generation of X, Y and Millennials that will spend most of their working lives simply trying to afford their home."
Robertson said the 'Bank of Mum and Dad' could disrupt traditional players. "If people are going to their parents for a loan instead of banks then there is room for disruption from new players in the lending space to come and get market share," he said. Funder said that any amount, big or small, can help younger people get ahead.
"We've seen some transfers of around $30,000, which has made a big difference to children's lives and has been a meaningful intergenerational wealth transfer for parents," he said.
But what should people do if they don't have access to their parent's cheque book? "Buy a house that needs some work in a good area, do the work, pay it down and over time you should do well," Theobald said.
Similarly, Carlin argued that young people should try stand on their own two feet.
"I would always advise not to proceed with the Bank of Mum and Dad," he said.
"There are incentives available of up to $82,145 for first home buyers (in Victoria) and with the various schemes available and the right advice I am confident everyday Australians can continue to access the housing market."
"As a parent, if I were in the financial position to help my children I would always offer," he said.
"My personal view is that buying your house and paying down the mortgage is one of life's great achievements - to be debt free and to have the satisfaction of doing it.
"If parents are seeing their kids work long hours and struggle to purchase a property, I can understand that if you were in the financial position to assist, then you could be inclined to do so."
Original article on The Financial Standard
Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable and terms and conditions apply (available on request). Household Capital Pty Limited is a credit representative (512757) of Mortgage Direct Pty Limited ACN 075 721 434. Australian Credit Licence 391876.
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