Residz Team 3 min read
Up in a puff of smoke went the dreams of thousands of first home buyers in 2020-2021. They watched in despair as Sydney became the third least affordable city in the world and Melbourne the sixth. Outpriced by tens, sometimes hundreds, of thousands of dollars, buyers had to look at all options. And the best option for many is BOMAD. Bank of Mum and Dad is now the 9th largest mortgage lender in Australia. But how are mum and dad coping as bankers, and why is the baby of the family their most likely customer?
BOMAD contributed on average around $89,000 to their child’s home deposit in 2021, according to Digital Finance Analytics. If you’re a lucky recipient, the ATO says you don't need to report money received as a gift in your tax return if:
Pensioners have gift limits and there can be consequences for their own income, so it’s important to get expert advice before giving away any money.
For others, the money from the Bank of Mum and Dad is a loan. The ATO says this is tax free but one comment on its website advises caution, as when you apply for a home loan the bank lenders will treat the loan from mum and dad as a personal loan and will consider it a liability. This may impact your borrowing capacity. As well, the loan may not be viewed as ‘genuine saving’ which banks like to see as evidence of your financial discipline.
Still others turn to the Bank of Mum and Dad to go guarantor for a bank loan. If you (the borrower) can't make the loan repayments, it’s mum and dad who will have to pay back the entire loan amount plus interest. If they can’t do that, they may lose their own home or car if they were used as security against the loan. Mums and dads should be made aware of these risks and speak to a financial expert before they agree to go guarantor for their kids.
Many mums and dads scrabble week to week to meet financial commitments while trying not to default on their own home loan. A fairly recent report found the most indebted group in the country is Generation X (born 1965 – 1980) with the ‘peak debt burden’ on those aged 30-50. About a third of 60 to 65 year olds are still paying off their mortgages, says an MLC report. Many have been Bank of Mum and Dad for decades, paying for bills, schools, sports registrations, holidays, trampolines, braces, and iPhones. Financial platform Mozo reports two thirds of parents helping kids purchase property feel they are under ‘significant financial stress’.
So, can the BOGG Bank (Bank of Grandma and Grandpa) be the answer? With a disdain for credit and huge equity in their homes, many grandparents in their 70s and 80s would be well set up to help with house deposits. Already many are forking out for schooling.
“Private schools say 15-20 per cent of school fees are paid for by grandparents,” an article quotes head of Lifeplan Matt Walsh as saying.
However, a survey by Starts At 60 shows lending money for a home deposit drops away after the age of 65. Baby Boomers aged between 55 and 60 were most likely to give their kids money for a home deposit, followed by those aged between 60 and 65. It’s likely to do with the ages and stages of the kids needing help, but perhaps oldies become more protective of their independence and pensions.
Fascinatingly, it’s the babies of the family who are helped the most by BOMAD. Mozo’s survey shows 28% of parents saying they support their youngest children the most. This was followed by financial support for middle children (15%), with only 9% of parents saying they support their eldest kids the most. About six-in-ten parents say they have given their adult kids at least some financial help within the past year of a recent Pew Research survey.
First home buyers increasingly need help to buy a house. Ageing parents are living longer and need their money to pay off a mortgage, bills, and medical expenses. By the time most kids stand to inherit from their parents, they’re into their 60s themselves. The Bank of Mum and Dad isn’t topped up much by selling up and moving to a regional area like it used to be. Skyrocketing prices in areas popular with retirees leaves little cash, and the changeover costs can be considerable. Mums and dads are piggy in the middle of the property boom, and parents and children should tread carefully before rushing to a BOMAD solution.
Image: Pixabay