If you were asked who the top 10 lenders in Australia are, you would be forgiven if you did not think to include Mum and Dad. According to the Financial Review, in the past 12 months, the Bank of Mum and Dad (BOMAD) has risen to ninth place of Australia’s top lenders, ahead of Citigroup, AMP and HSBC.

With rising property prices and stagnant wages, it is easy to see how many young Australians would find it impossible to even dream of purchasing their own home, unless they received some financial help from their parents. As a result, it is not uncommon for parents to lend (or gift) their kids the deposit for a first home, act as guarantor for their home loan, or even settle their mortgage repayments for the first year.

According to research by Digital Finance Analytics, more than half of first-time buyers receive financial assistance from their parents. The average amount lent by parents was reported to be a whopping $89,000! Comparing these figures to five years ago, where 29% of home buyers relied on BOMAD for an average of $63,000 in contributions, shows just how much this lender has grown.

Most parents want to see their kids achieve the ‘great Australian dream’ and understand the financial stability that comes with this investment.

So, should parents lend for love? And if they do, how could this act of kindness have unintended consequences?

Why is BOMAD growing?

There are a range of reasons for this sudden jump in parental contributions such as rising house prices, global challenges, and the current competitive market, just to list a few. Many first home buyers are simply finding it difficult to come up with the amount required to get a foot onto the property ladder. However, due to the pandemic, the housing market has seen the perfect storm of record low interest rates (an RBA record low of 0.10%) and increased Government Grants. It seems that if there was any time to buy a home, it’s now. 

Many lenders have introduced tighter lending criteria and stricter servicing requirements as they look to reduce the amount of risk they carry. This has lead to those wishing to borrow needing to save the 20% deposit required to avoid large upfront fees, such as Lenders Mortgage Insurance (LMI). Leaving the question, what alternative options are out there to assist buyers and what risks should be considered before turning to the Bank of Mum and Dad?

Are there any risks in borrowing from the Bank of Mum and Dad?

Simply put, yes. While lending for loved ones can provide a great opportunity for them to get into their own home, sooner, experts warn that the increasing reliance on the Bank of Mum and Dad could create disparity in the market. The same research from Digital Finance Analytics shows that those who had parental help are three times more likely to default on their loan within the first five years, meaning that this is now becoming a riskier lending situation for banks.

Brendan Rynne, KPMG’s chief economist, said parents who lend large amounts of money to their adult children could experience financial stress during their retirement. “Parents are either withdrawing funds out of their superannuation accounts or they are taking a home loan against the equity in their houses to help their children”. Although parents want to help their kids get into houses, if financial situations were to suddenly change, in some circumstances it could place pressure on the family and relationships. If this is the path your family is choosing to go down, ensure that all parties are onboard and understand the risk.

Are there any other options?

Before you gift or lend large sums of money to your children, there are a few other options that may help. A simple one is to encourage your children to start saving from a young age. This will encourage them to establish a regular savings plan once they have a steady income and give them a head start when it comes to starting their home ownership journey.

Do your research. Look around at a few different lenders and the products they offer. HomeStart have unique product offerings such as no LMI, low deposit loans and shared equity options. Attend one of our free home buyer seminar’s together to learn about the home buying process and a few top tips along the way.

If you think that you are ready to begin the home buying journey or make a fresh start, jump onto our calculators, or contact HomeStart today and take the first step in getting into your own home, sooner.