Imagine if the bank you used to buy a house simply forgot about your debts after a while and allowed you to stop making payments?
It sounds too good to be true, but that is exactly the situation with one of Australia’s leading housing finance providers which pumps in an incredible $35 billion a year Australia’s housing market.
The institution of course is the “Bank of Mum and Dad”, which has become a very large lender as Australian property prices vaulted out of the reach of many younger people.
The seeds of this bank have been created by the incredible growth in house prices against household income, rising from around three to four times average incomes in the 1970’s to as high as eight or even 12 times income in some parts of Australia now.
Faced with their children being unable to buy somewhere to live and many years of hard graft just to save a meaningful deposit, many parents started getting them over the hump with gifts or loans which have kept rising over time as prices keep growing.
Loans Increasingly Non-Performing
Initially the idea of many of these “loans” was that they would be paid back, sometimes with interest but over time the lending conditions at the bank of mum and dad grew less onerous.
Other forms of parental lending include providing rent-free housing, co-ownership or acting as guarantor for the loan but, as the amounts have increased, the prospects of the “bank” getting any loan repayment has also dropped.
Instead, the complications have been rising.
Issues Aplenty
There are plenty of worrying issues with being shut out of property ownership including delayed family formation, a reluctance to move out of home and even an unhealthy reliance on financial assistance from parents to meet living expenses.
Then there is the thorny issue of how to equalise things between siblings if one needs a loan from the bank of mum and dad but others do not.
With the growing lack of loan repayments, getting a loan from the bank of mum and dad is increasingly like an early inheritance.
Making such an arrangement fair over time to other children is a really curly issue, particularly when you factor in the potential reduction of inheritances due to long periods in aged care.
Fairness a Difficult Issue
Is the child that gets an early inheritance the lucky one who got in early when there was still something on the pot or are they going to miss out later on when the final inheritance is split up?
Another risk is a divorce or break up for the person who got the loan from the bank of mum and dad—that money could well be split up with other matrimonial assets unless there is a well-documented loan in place.
The other side of the issue is whether the bank of mum and dad can actually afford to deprive themselves of a chunk of their money without jeopardising their own retirement years.
The bank “loan” might start with promises of later support or repayment if needed but over time such promises can be forgotten or be impossible to fulfil without a property sale.
Documentation Worth Considering
Given the sensitivity of family relationships these are all thorny issues that need to be faced head on—we are, after all, talking about $35 billion a year here!
Some of the many tips are to check that any loan is viable for the parents, that if required lawyers, accountants, and even financial planners are involved in the discussion and documentation of the deal and that there is a judgement call made that proceeding won’t cause any deeper family issues down the track.
It is a difficult issue all around but with property prices outperforming income over the long term it is not an issue that will go away anytime soon.
