Bank of Mum and Dad: Millennials’ Key to Owning a House in Australia
With a consistent increase in house prices, the Australian dream of homeownership seems increasingly elusive for the younger generation.
In May 2023, the median house price in Sydney alone is around AUD 1.46 million, reflecting a steep 80% increase in a decade.
Similarly, other Australian cities have also witnessed significant hikes in property prices, outpacing the wage growth of millennials who are mostly beginning their careers or are in the early stages of it.
As a result, an increasing number of millennials are turning to the ‘Bank of Mum and Dad’ for financial assistance.
According to a recent report by the Australian Housing and Urban Research Institute (AHURI), approximately 40% of Australian millennials (aged 25-34) are eyeing turning to the ‘Bank of Mum and Dad’ for future home purchases.
As per the latest data, about 60% of first-time home buyers in Australia received financial help from their parents, a sharp increase from 20% in the early 2010s.
This has effectively made the ‘Bank of Mum and Dad’ the ninth largest mortgage lender in Australia, with an estimated value of over AUD 34 billion.
What Does Bank of Mum and Dad Mean for Australians?
In Australia, the ‘Bank of Mum and Dad’ refers to the financial support parents provide their children, primarily for purchasing homes amidst rising property prices.
As house costs significantly outpace wage growth, more young Australians rely on parental assistance for down payments, mortgage co-signing, or direct loans.
What Are The Advantages And Disadvantages Of Using the Bank Of Mum And Dad For First-Time Home Buyers?
Using the ‘Bank of Mum and Dad’ as financial assistance can have advantages and disadvantages for first-time home buyers.
- Easier Access to Homeownership: For many first-time buyers, getting financial assistance from parents can make homeownership attainable. This assistance can enable them to afford the down payment, qualify for a mortgage, and secure a home sooner than they might otherwise be able to.
- Less Interest and Flexible Terms: Loans from family members often come with low or no interest rates and more flexible repayment terms than traditional loans.
- Avoidance of Mortgage Insurance: A larger down payment, supported by parents, may help avoid Mortgage insurance, which is typically required by lenders when the down payment is less than 20% of the home price.
- Potential for Financial Education: Receiving and managing a loan from parents can be a valuable opportunity for young adults to learn about real estate, loans, interest, and other critical financial concepts.
- The strain on Family Relationships: Loans between family members can create tension and potentially harm relationships, especially if repayment or disagreement about the loan terms becomes difficult.
- Inequity Among Siblings: Providing assistance to one child and not others (or providing unequal service) can breed resentment among siblings.
- Risk to Parents’ Financial Stability: Parents who provide substantial financial assistance may put their financial security at risk, particularly if they’re nearing retirement.
- Potential Lack of Financial Independence and Responsibility: Relying on parental assistance may delay the development of financial responsibility and independence in young adults.
- Inflated Property Prices: On a larger scale, the ‘Bank of Mum and Dad’ can increase property prices as it artificially inflates the buying power of first-time home buyers.
- Perpetuating Wealth Inequality: This practice may widen the wealth gap, as not all parents can afford to help their children buy a home.
How Does the Bank of Mum and Dad Work?
The ‘Bank of Mum and Dad’ work by parents providing financial support to their adult children, primarily to help them enter the housing market.
The specific mechanisms can vary significantly based on individual circumstances and family dynamics, but there are a few common ways this can occur:
Gifts: Some parents give their children money without expecting it to be paid back. This is often considered a gift rather than a loan and is a standard method of helping young adults with a deposit for a house.
Loans: Parents can loan their children money, which they are expected to repay over time. These loans can come with lower or no interest rates than bank loans and may have more flexible repayment terms.
Guarantor Loans: Parents can act as guarantors on a mortgage. This means they agree to cover the mortgage payments if their children cannot do so. In some cases, this might also involve putting up their own home or savings as security against the loan.
Equity Release: Parents who own their home (or a significant portion of it) can take out a loan against the value of their property, which they then lend or gift to their child for a deposit on a house. This is sometimes called an equity release or a reverse mortgage.
Co-purchasing: Parents and children can buy a property together as joint tenants or tenants in common. The parents’ income and assets can help secure a larger loan, and the parents may live in the property, rent out their portion, or leave it empty.
No matter how the ‘Bank of Mum and Dad’ is structured, it’s crucial to have clear agreements in place, preferably written and legally sound, to avoid misunderstandings and potential disputes down the line.
It’s also vital for parents to consider their own future financial needs and security before offering significant financial assistance to their children.
What Could Be The Future Legal Implications Of Using the Bank Of Mum And Dad?
The future legal implications of using the ‘Bank of Mum and Dad’ are often contingent on how the initial agreement is structured and what happens in the parties involved’s lives.
Here are some potential implications:
Repayment Disputes: If the money provided was a loan and not a gift, disagreements could arise over repayment.
The child might be unable to meet the agreed-upon repayment terms, leading to potential legal disputes.
Inheritance Issues: If one child has received financial help while others have not, it could lead to disputes over inheritance.
For fairness and to prevent future legal conflicts, parents should consider adjusting their wills to account for any significant financial assistance given.
Family Law Complications: If the child who received financial help enters into a relationship or marriage that later ends, the funds could become part of the asset pool considered in a separation or divorce settlement.
This can lead to legal disputes and complications, especially if there is disagreement over whether the money was a gift or loan.
Tax Implications: Tax laws vary by country and state or region, so there may be future tax implications for parents and children.
For instance, if the parents die, there may be inheritance tax implications, particularly if the loan has not been repaid.
Bankruptcy: If the parents or child face bankruptcy, the loan may be called in or considered part of the insolvent estate, which can have legal and financial consequences.
Guarantor Risks: If parents act as guarantors on a mortgage and the child defaults, they could be legally responsible for the debt. This could result in loss of assets or other financial hardships.
Given these potential future legal implications, seeking legal advice is essential when setting up a ‘Bank of Mum and Dad’ arrangement.
It’s crucial to have a legally binding agreement that clearly outlines the terms and conditions of the arrangement, which can help to protect all parties involved.
Using the Bank of Mum and Dad in Purchasing Your First Home?
At Justice Family Lawyers, we help clarify the process, ensuring it’s beneficial and legally sound for all involved.
Whether you’re a parent providing support or a first-time home buyer seeking help, rely on our expert guidance. Connect with Justice Family Lawyers today and make the ‘Bank of Mum and Dad’ work for you smoothly and securely.
Principal of Justice Family Lawyers, Hayder specialises in complex parenting and property family law matters. He is based in Sydney and holds a Bachelor of Law and Bachelor of Communications from UTS.