With over 50% of first time buyers getting support from the “bank of mum and dad”, a number of parents were looking to budget 2018 to help shoulder the financial cost of helping their children get into the housing market. Unfortunately, as Fintech expert and founder of credi.com, Tim Dean, explains, the 2018 Budget left first time buyers out in the cold, with no immediate relief via first time home buyer’s support or elsewhere. Instead, baby boomers have been left to recycle the increased tax break from any earnings they may have.
With trillions of dollars moving between baby boomers and millennials as financial support, often by way of loans, parents are looking for ways to make this happen in a cost effective way and they’re looking to avoid the potential pitfalls of lending to their nearest and dearest.
What’s behind this growth? It’s well-known that we’re all living longer and millennials are looking for support from nearer to home. It’s likely many have watched property values increasing and figured that their asset rich parents can help them out. The very same millennials are shunning traditional credit, with a year on year reduction in credit card usage being recorded, an increased usage of debit cards and buy now, pay later schemes. So the path to the bank of mum and dad is now one well-trodden by many.
The bank of mum and dad is a huge financial institution, commentators offer varying numbers, estimating it’s between the 5th & 10th largest bank in Australia. And with banks likely to tighten lending as a result of the ongoing Royal Commission, it’s going to be even more important in people’s lives.
For borrower and lender, using the bank of mum and dad can be a real win-win. The rates offered are usually very low, and so its cheap money with the parents leveraging against their mortgage to help out, which is almost always at a materially better rate than retail credit. The parents can help their children get on the property ladder, accessing the first time home buyer’s grant, replacing rental expenditure with investment in an asset, and with support to get a large enough deposit they can avoid the cost of mortgage insurance. These factors all make good financial sense. And at a personal level, parents might want to motivate their children to vacate the “home hotel” sooner, rather than later!
But what can go wrong? Most parents are choosing to structure their financial support as a loan, as they figure that a gift may end up as a source of dispute if, for example, their children are in a relationship that ends. The guarantor route, is not attractive to many, as they are trying to lessen their financial footprint, not increase it.
Any misunderstanding about the terms of a loan and the resultant friction between the parties can last for years and at huge cost (financially and emotionally), so prevention is better than the cure. Missed loan repayments are almost always likely to aggravate, and it’s the informality of these loans that generally causes the issues. The key advice to anyone looking to lend to someone they know, is to ensure there is appropriate documentation, a loan agreement with clear terms and better still, a system to remind when repayments are due.
For many that in itself is quite daunting, and because the parties are often reluctant to task lawyers to draft the agreement for reasons of either cost or deemed appropriateness to their relationships, it often never gets done.
The good news is that there are readily available solutions at hand, one being Credi.com which offers a cost effective cloud based loan documentation and management solution, covering the lifetime of the loan, including repayment reminders, making sure everything is communicated – thereby avoiding the dreaded money chat.
So what is the future for the bank of mum and dad? Bankers for years have told us they are the only people who can handle our money. But thousands of Australians are finding that there are other institutions, not least of which is the bank of mum and dad, which can comfortably co-exist with traditional banks. It makes perfect financial sense that in appropriate circumstances people should lend directly to each other on the basis of their relationship. And with loans mainly being for the practical things of life; a home, a start-up business, paying off high cost credit, renovations and a new car, they can enhance relationships and our collective standards of living.
A well-structured loan can deliver real benefits – better rates and flexibility. Get it right, and everyone benefits, even the banks.
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