With the percentage of South Australian first home buyers at record lows (10% of all buyers in December 2016 according to ABS data) it is not surprising that many adult children are asking their parents for a helping hand when it comes to buying a home.
Turning to the ‘bank of mum and dad’ is becoming increasingly common, with Digital Finance Analytics
revealing that from October to December 2016 more than half (54 per cent) of first-time buyers received financial help from their parents.
What is even more staggering is the statistics showed that on average parents are handing over more than $85,000 to boost their kids deposit.
This compares to about 4 per cent of first home buyers relying on the bank of mum and dad between January to March 2010
, where the average financial contribution was just over $20,000
There are some obvious reasons for this dramatic increase, including:
- Rising house prices, making it harder to afford the house you want
- Interest rates on savings accounts are low, meaning it’s harder to save for a deposit
- Limited first home owners grants available
- Banks have tightened their lending criteria and require larger deposits
Most parents want to see their kids achieve the ‘great Australian dream’ and realise the financial stability that comes with this investment.
So, should parents lend for love and if they do, how could this act of kindness have unintended consequences?
Are you putting your future financial security at risk?
Brendan Rynne, KPMG’s chief economist, said parents who lend large amounts of money to their adult children could experience financial stress during their retirement
“Parents are either withdrawing funds out of their superannuation accounts or they are taking a home loan against the equity in their houses to help their children,” he said.
“Both of those really put greater financial pressure back on the parents at a time in their life when they may have finished paying school fees but the largest costs they are going to incur relate to health (with an ageing population).
“Although parents want to help their kids get into houses — any parent wants to see their kids have a prosperous life — I can’t help but think in some circumstances it is going to place pressure on the family relationships.
“What if parents need to re-access the money they’ve lent and the kids can’t access any equity to pay that back? The parents are really left stranded.”
Aside from lending money to kids, a greater number of parents are becoming guarantor for their children.
A survey by Mortgage Choice, found 4.9 per cent of first home buyers in 2016 had a parent or immediate family member go guarantor on their home loan.
This was up from 3.9 per cent in 2015.
A guarantor home loan requires another person (such as a parent) to put up a property they own (or have equity in) as security. This allows the first-time buyer to borrow up to 107% of the purchase price of a home – covering the deposit, and other government and lender fees and charges.
While this may sound like a good option, CEO of HomeStart Finance, John Oliver, said it is a decision that comes with risks.
“When helping your children to buy a home through products such as guarantor loans, parents experience reduced levels of wealth, but also risk losing everything,” he said.
“If there is a change of circumstances, such as your child loses their job, they are unwell for a period of time or they experience a relationship breakdown, and they can’t make repayments, your assets are on the line for the portion you have guaranteed.
“This could mean the lender will allocate some of the parents income to repaying the debt, or in the worst case scenario, the parents could lose their home.” Mr Oliver said if this occurs the parents’ credit rating will also be affected, which in turn may cause problems if they need to apply for a loan or worse, they may not be able to use their own home as security when taking another loan.
“As well as the financial risks associated with lending money or becoming a guarantor for your children, you also need to consider the impacts it will have on the family as a whole,” he said.
“While you may be in a financial position to provide financial support to one child, can you provide that same level of backing to all your children?”
How to help without splashing the cash
Let your kids to stay at home
Paying rent adds another level of difficulty when your kids are trying to save to cover the upfront costs. Invite them to move back into the family house, and negotiate an amount for weekly rent and bills, which is less than if they were leasing someone else’s home.
Instill in your kids good savings habits
Meeting those upfront costs will be made easier if your children start saving from a young age. In a bid to give your child a head start, encourage them to establish a regular savings plan once they have a steady income.
Teach your kids about the different options out there
While many banks and mainstream lenders require large deposits, or for you to spend many thousands in lenders’ mortgage insurance, there are smarter options out there.
For example, some lenders such as HomeStart Finance offer low deposit options
(as low as 3%), which significantly reduce upfront costs of buying a home and enables your kids to break into the market sooner. For those who haven’t been able to save a substantial deposit, or are keen to buy sooner, this could be the perfect option.