The bank and mum and dad is alive and well, with an Australian Unity survey of more than 500 retail investors finding 74% are building wealth to give their children a financial kick-start.
The bank of mum and dad mindset has been around for decades. However, with house values soaring nearly 400% in the last 30 years and the average house deposit taking up to 16 years to save, Australian Unity’s Adnan Glinac said today's parents were increasingly concerned that without their help, their children might never enter the property market.
“Many economic issues driving the bank of mum and dad mindset require long-term solutions,” said Glinac (pictured above left), who is the general manager of Australian Unity’s super and wealth division.
“We’re in a housing market in chronic short supply, we have older Australians who have built incredibly large superannuation and property portfolios, and we’ve got younger generations who are saving but have comparatively few assets, face slower wage growth while paying rising rent and living costs.
“This prevailing environment will lead to more intergenerational financing of Australia’s young adults.”
MFAA non-executive director Caroline Jean-Baptiste (pictured above centre) agreed. She said parents played an integral role in homeownership for their children as the dream of saving for a deposit fell further out of reach.
“In the low-interest rate environment, many prospective home buyers set a savings target based on how much they could borrow and what they could buy within their budget,” said Baptiste, who owns a Mortgage Choice franchise in Brisbane.
“As interest rates increased, and home prices followed, many homebuyers have had to compromise and adjust their expectations regarding the type, size and location of the home they can afford.
“Many first home buyers are needing to save more and earn more to achieve the goal they had only a year ago.”
Shifting priorities: Homeownership in, weddings out
The financial landscape for young people differs significantly from that of their parents, necessitating different priorities.
By 2033, 98% of respondents prioritise home ownership, while only 13% anticipate paying for a wedding, which traditionally parents have helped with, according to the survey. Additionally, only 50% of those aged 50-59 expect to retire successfully by 2033.
Baptiste said she had seen more parents willing to assist in not only getting the younger generations into homeownership but many reaching their 40s, having never owned a home becoming weary of renting.
“We are seeing parents more open to the option to assist as they witness the challenges of saving a deposit, especially when their children have already started a family of their own.”
Sydney-based Mortgage Choice broker Mark Sieler (pictured above right) said he had observed an increase in the trend of the bank of mum and dad. However, not all parents were willing or able to help.
“Those who can often prefer gifting or lending up to 20% of the property's value instead of using a parental guarantee loan structure.”
It’s not just direct financial contributions that parents are making either.
Australian Unity found parents allow their adult kids to live at home longer in a rent-free environment, or even in a granny flat arrangement as rent costs soar.
Glinac said his advice to millennials thinking about becoming the bank of mum and dad was to first make sure financial situation was strong before building wealth for kids.
“Make sure you’re on track to meet your retirement objectives and have adequate cash for emergencies,” he said.
“Make sure you sit down and understand what is important to you, understand your financial goals, know how long you want to build wealth for and what your risk appetite is, as this will help determine which investment vehicle is best for you.”
Advice for signing on guarantors
First home buyers often look for solutions to enter the market sooner, through various incentives, schemes, and grants.
For example, the Home Guarantee Scheme helps people enter the market with a smaller deposit, while others use First Home Super Saver Scheme and stamp duty concessions that are available.
However, Sieler said it had become increasingly difficult for first home buyers despite these schemes.
“Rising house prices obviously make it difficult to save the required amount of deposit and the higher value of properties across many parts of Australia render the aforementioned schemes redundant in many cases,” Sieler said.
“The price cap in Sydney and regional NSW for the First Home Guarantee scheme as an example is $900,000 whereas the median Sydney house price according to CoreLogic is now close to $1,400,000.”
Ironically, Baptiste said it was rising property prices that had given parents more confidence in becoming guarantors.
Baptiste noted that many parents were stepping in as guarantors – a trend facilitated by lenders creating new products and revising policies to simplify the guarantor process.
Sieler agreed, saying that family guarantee loans, backed by the federal government through the National Housing and Finance Investment Corporation, previously had differences in borrowing capacity among lenders, but these differences were “less evident now”.
However, Baptiste said it was essential that homebuyers understood what their parents were risking by becoming a guarantor.
“A strategy I recommend to my home buyers is that they reduce the loan as quick as possible and take advantage of market increases to release the guarantor as soon as possible,” she said. “A loan that allows additional repayments on the guaranteed portion is a suitable structure to achieve this outcome.”
Overall, Glinac said the most essential advice for parents was to be clear about their terms of assistance.
“Ask whether you’re giving it as a gift or as a loan. If it’s a loan, do you want it paid back over the short term, or will you get the funds back once the house is someday sold?” he said.
“It’s also important to ask yourself whether your child can genuinely afford the home they’re looking for and can commit to servicing the mortgage for the long-term.”
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