A time honoured institution, the ‘Bank of Mum and Dad’ was founded shortly after your conception and has been contributing ever since.
From those Nike trainers you ‘needed’ to be cool in primary school, through to books and clothes and trips and formals — all these perks were brought to you proudly by the Bank of Mum and Dad. Yet despite the unwavering selflessness of that institution, you can’t even recall what their logo looks like? What a shame!
To drop the bit for a moment, the Bank of Mum and Dad is a colloquial expression to describe familial lending that’s commonly executed through parents or grandparents. We know everyone’s family situation is different and not everyone will identify with the above but we’ll come around back to that.
As house prices skyrocket and most banks and lenders require customers to present eye-watering deposits, the Bank of Mum and Dad has unofficially become one of Australian’s largest lenders. It’s now so large as a home loan enabler, the Productivity Commission stated if it were an actual bank, it would be somewhere between the 5th and 9th largest mortgage lender, having loaned young Australians more than $2.7 billion in the 12 months leading up to November 2023.
The state of the economy and the housing market, along with this practice of parental financing has forced young first-homebuyers to become increasingly reliant on familial wealth for their own future prosperity.
With the sizeable portion of a 20% minimum deposit requirement as standard across Australia, along with all the costly extras needed to get into the property market (stamp duty, insurance, and so on), the Bank of Mum and Dad is the only solution for many. Unfortunately though, not every family is in the position to help younger generations with the amount needed for a deposit, or even to act as guarantor for a home loan.
Unlike most banks, the Bank of Mum and Dad isn’t allowed (by lenders) to call the money they offer a ‘loan’, instead it must be a ‘gift’. How do we know it’s a gift? Well, with a good old fashioned letter of course! An archaic-sounding ‘gift letter’ is required, alongside the magical appearance of funds into the recipient’s account of course. But why is it called a ‘gift’ when there’s an absolute understanding, in some cases even a promise, to pay it back?
If it was agreed that the money coming from the parents is actually a loan, then this needs to be taken into account at the time of the loan application. It may be perceived as affecting the applicant’s ability to service the new loan, and the bank/lender could automatically decrease their borrowing capacity simply because there will now be a second loan to be repaid.
While this notion of gifting may seem clear and simple for the lender, it can leave family waters murky.
Often the agreement reached between parents and children leaves no paper trail, and parents or grandparents rarely seek legal advice because they may feel duty-bound to provide this kind of help to their offspring. This is compounded when the family loan must be seen as a gift for the sake of the external lender. If later a dispute does arise over what’s ultimately a handshake deal, the only legal documentation is the aforementioned letter, which does little to protect the ‘gifter’.
Adding extra pressure to parents is the potential feeling to have to provide the same level of assistance to everyone within the family structure. Not everyone may want or need this help, and with the perceived truth of the ‘loan’ not clearly and legally documented as such, it can lead to longer term issues when it comes to wills and inheritances. This becomes a slippery slope and is particularly concerning when it starts to contribute to the ever increasing rates of elder abuse in Australia which is often, sadly, financially motivated.
See, those waters? Murky indeed, and something every family should be conscientious about.
In the past, the Bank of Mum and Dad was only available to the wealthier segments of society. Increasingly however, more and more young Australians have no choice but to turn to their families — or be locked out of the housing market entirely. It’s too soon to truly understand what the knock-on effects will be of emptying one generation’s bank accounts to prop up the next generation. It begs the question, if there’s a struggle now to look after ourselves financially, then who’s going to look after Mum and Dad when they need it?
At Sucasa, we believe in levelling the playing field for all. That’s exactly why we offer home loans at a much lower deposit rate compared to traditional lenders — as low as 2%, and without the need of a guarantor!
If you’re looking to buy, learn more about our loan options or apply for a loan that suits your individual financial situation.
