If you have a child in their mid-twenties like I do, hearing their view on home ownership and how it impacts their lifestyle choices is both disheartening and familiar at the same time. Taking the plunge to own your first home always feels impossible (regardless of the times).
What I can’t argue with is the current shortage of housing supply, which has resulted in queues at home openings and offers being added to a pool of other offers to be ranked in order of attractiveness. In some Perth suburbs now, it is more expensive to rent than to pay off a mortgage.
Many of you may be asked to (or have already) become the Bank of Mum & Dad (BOMD) due to the strength of your financial situation.
It is noteworthy that 50% of BOMD borrowers are under financial stress compared to 28%, who rely on their own resources. BOMD borrowers are also more likely to have lower levels of financial management skills, including budgeting and savings. The average (BOMD) loan is $89,000 (2022 figures), so could be much worse now)
“The Australian Housing and Urban Research Institute found 40% of 25- to 34-year-olds expected to call on the “bank of mum and dad” to achieve home ownership, with 74% of adult renters holding less than $5,000 in savings.” Guardian Newspaper.
I am not sure what is more shocking: the number of younger Australians dependent on their parents financially or the small amount of savings that renters have.
Whilst it is an amazing gift to be able to support your children financially, there are some things that you should be aware of that may influence how you become the bank for your children.
Transferring money directly to children is automatically defined as a gift.
- Gifting money means that the cash and the assets it buys now belong to your children.
- Partners of your children are entitled to this money depending on their relationship and can’t be protected if relationships break down.
Properly documented loans can protect your original gift from the Family Law Court. If your children are in business, it will also protect this gift from potential creditors that their businesses have.
- In any dispute, the loan needs to show:
- terms of repayment (when it should be repaid and whether interest is payable);
- whether any loan repayments were made by the parties;
- evidence of any discussion between the parties as to the existence and terms of the loan;
- whether there was an expectation of repayment;
- whether there was any security provided for the loan, such as a registered mortgage;
- whether the parties and/or parents said anything to third parties (such as banks or Centrelink) about the character of the advance.
- The loan itself should be supported by a first mortgage, a second mortgage, or at the very least a caveat. Having a mortgage to support the loan is better in most cases. This would lead to the interest of that loan being recorded and brought to the attention of any subsequent creditors and other parties interested in the security of the property. It will also better protect everyone if an unexpected event occurs that puts the finances at risk, such as a dispute involving a spouse or creditor. If the loan agreement is not secured, in the event of bankruptcy you will be just another unsecured creditor and may never be repaid.
“The Bank of Mum and Dad—what are the risks?” Monday, February 20, 2023, Andrew O’Sullivan-Newbold (Hicks Oakley, Chessell & Williams)
While risks are part of life and we all start with the best intentions, putting parameters around your generosity helps preserve family wealth and creates greater security for the people you want to help the most. Speak to your financial adviser about this issue. If you don’t have an adviser, please feel free to contact Supervision about this issue and how we can help.