The Bank of Mum & Dad – a relationship testBy Sam Hunt

‘Bank of Mum and Dad’ has emerged as the country’s ninth-largest mortgage lender. Sam Hunt discusses the importance of obtaining independent Financial Advice to ensure financial security for the future.

The Bank of Mum & Dad – a relationship test By Sam Hunt

Bank of Mum & Dad

As property prices continue to surge across Australia, it’s a natural instinct for parents to want to help their children get into the market.

In fact, so big has the desire to help become that the so-called ‘Bank of Mum and Dad’ has emerged as the country’s ninth-largest mortgage lender.

It is now estimated the Bank of Mum and Dad has outstanding loans of about $35 billion, which makes it bigger than AMP, Citigroup and HSBC Australia for mortgage lending, according to figures from independent market analyst Digital Finance Analytics (DFA).

The DFA research found around 60% of first-time buyers are relying on financial help from their parents. With large amounts often in play, there is a real need for robust financial planning.

Compared to a traditional mortgage lending institution, the Bank of Mum and Dad is different – it’s personal. If not handled well, it could spark a serious test of the relationship both between parents and their adult children, and between those children and their partners.

In making the move into inter-generational lending, the key question to be answered is whether the funds are a gift or a loan. If it’s a loan, then when, and on what terms, are the funds borrowed to be paid back?

Parents need to safeguard and protect monies provided to children in case circumstances change. For instance, in the event of a future relationship breakdown. And that’s where it gets tricky. Asking children to sign an agreement whereby their partners have no claim to the money in the event of their separation or divorce is a path most in-laws often do not want to go down. Equally, should the relationship between the parents themselves break down, the net pool of assets of the two parties that is available to be divided must be clearly identified, including any funds lent to children.

That’s why – whether you are providing financial assistance to your adult children (and to his or her partner as a couple) or you are intending to receive housing finance from your parents - there should be a clear, written agreement which sets out whether that money is a gift or a loan to be repaid.

Parents also need to ensure their own retirement funding isn’t adversely affected, especially where there is more than one child, and a similar offer is to be made to all children.

It’s all part of an ongoing conversation that requires clear communication and highlights the importance of independent financial advice before any funding is entered into. That way, there is much less likelihood of future issues, and everyone is happy, or at the very least, clear on the outcomes.

Sam Hunt

Sam Hunt - "I have a genuine desire to help our clients achieve what is most important to them, by giving them clarity around the important financial decisions they face."

Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice from WARR HUNT prior to acting on this information. Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product. Past performance is often not indicative of future results.