For an increasing number of young Australians, the dream of home ownership is being kept alive thanks to a lesser-known lender – the ‘Bank of Mum and Dad’. With skyrocketing property prices and stricter lending criteria, many first-home buyers are turning to the bank of family wealth for the financial boost they need.
It’s no secret that breaking into the housing market has become an uphill battle, especially in major cities like Sydney where median prices sit well above the $1 million mark. But just how prevalent is this phenomenon of parents providing financial assistance to their adult children? And what kind of sums are being handed out?
How Much Are Parents Contributing?
While there are no official figures, various research studies have attempted to quantify the ‘Bank of Mum and Dad’ in recent years. The findings show that financial support from family has become important for this generation well into young adulthood.
A 2023 Finder survey found that parents are willing to contribute an average of $33,278 to help their children with the deposit for a first home. This indicates that the “Bank of Mum and Dad” phenomenon might be playing an even bigger role in assisting young Australians in entering the property market.
However, the numbers varied significantly by location. In Sydney for instance, the average parental contribution was much higher at $130,000. Rising to over $150,000 in some of the city’s priciest suburbs.
Another survey by the Mortgage and Finance Association of Australia shed more light. Their results show young adults from diverse socio-economic backgrounds get financial help from parents:
Out of all financial support parents offered to their kids:
- 17% received outright cash gifts
- 19% had parents go guarantor on loans
- 24% were lent money with flexible loan terms
So whether it’s a lump sum gift, acting as a guarantor, or an informal loan agreement, the ‘Bank of Mum and Dad’ is playing a major role in making home ownership attainable.
Gifts vs. Loans
Of course, not all parental assistance is created equal. Some of these contributions from the ‘Bank of Mum and Dad’ are essentially interest-free loans that need to be paid back. While others are outright gifts with no strings attached.
The same MFAA study found around 56% of this financial assistance was given as a loan, while 44% was in the form of a gift by parents to get their kids into the property market
There’s no one-size-fits-all, as every family’s financial circumstances and living costs differ. But these insights reveal the ‘Bank of Mum and Dad’ is becoming an indispensable lender for today’s home buyers in Australia, especially when it comes to clearing the deposit hurdle.
What’s Happening on a Socioeconomic Level
Much has been made of the increasing presence of the ‘Bank of Mum and Dad’ and the widening class divide it represents. After all, not every young person has access to the same family wealth to lean on when buying a home.
A generational gap is emerging, where those from more affluent backgrounds get a substantial head start on the property ladder. While those without wealthy parents to draw from face an even tougher road to home ownership amid rising costs of living.
Buying is More Expensive Than It Used to Be
At the same time, the prevalence of parents helping their children purchase property signifies a societal shift from previous generations.
Baby boomers enjoyed much more favorable economic conditions that enabled them to get their foot in the door earlier through home loans and mortgage insurance alone. But those same pathways are increasingly out of reach for millennials navigating higher home prices and tighter lending standards.
As a result, parents are stepping in to bridge the gap where traditional lenders fall short. Some experts view it as the new norm, an extra ‘life stage’ where kids remain financially reliant on mum and dad well into adulthood.
Legal Considerations When Borrowing From Parents
When engaging with the ‘Bank of Mum and Dad,’ it’s vital to safeguard all involved parties through:
- Proper Documentation:
- For Loans: Detail interest rates, repayment schedules, and default consequences.
- For Gifts: Documenting helps avoid disputes or tax implications.
- Seeking Legal Advice: Advisable to maintain healthy family relationships and clear expectations.
Potential Pitfalls for First Home Buyers:
- Impact on Borrowing Capacity: Money from parents may reduce how much you can borrow from banks.
- Tax Considerations depend on the nature of parental assistance:
| Assistance Type | Tax Considerations |
|---|---|
| Loan | Treated like a bank loan; interest may be taxable income. |
| Gift | Generally tax-free, but watch for capital gains tax if sourced from assets. |
- Risks with Parents as Guarantors:
- Use of their property equity could risk their home if the buyer defaults.
Professional Advice is Key: Consulting legal and tax experts can prevent surprises.
How the Bank of Mum and Dad Impact Government Decisions
As the role of parents enabling home purchases grows, some argue it represents a de facto policy shift by Australian governments to addressing housing affordability.
With median home values continuing to climb, the ‘Bank of Mum and Dad’ is increasingly filling the gap that progressively fewer buyers can reach on their own. Particularly for those seeking to avoid the added costs of Lenders Mortgage Insurance.
In fact, the Australian Prudential Regulation Authority now requires banks to factor in risk from parental assistance when assessing home loan applications. Official recognition that this informal lending channel has become systemic.
While certainly not a long-term solution, parents acting as the “lenders of last resort” may be inadvertently taking pressure off policymakers to enact more aggressive affordability reforms.
The ‘Bank of Mum and Dad’ Verdict
Love it or hate it, there’s no denying the ‘Bank of Mum and Dad’ has become an increasingly prominent and influential player in the Australian housing market.
For those fortunate enough to be able to access this informal stream of parental wealth, it can provide a legitimate pathway to home ownership that may not otherwise be possible through traditional financing alone.
However, it remains a double-edged sword exacerbating economic divides, rife with legal and tax implications to navigate carefully. Not to mention the personal dynamics at play when financial obligations are attached to family relationships.
At the end of the day, the ‘Bank of Mum and Dad’ reflects the harsh realities of housing unaffordability facing young Australians today. While enabling some, it perpetuates generational inequalities on the path to property for others.
Sound professional advice is crucial for ensuring any assistance received from family doesn’t come with unintended financial consequences down the road. If leveraged responsibly, the ‘Bank of Mum and Dad’ can be a powerful ally in the journey towards buying a home.
FAQ Section on The ‘Bank of Mum and Dad’ in Australia
How does Bank of Mum and Dad work in Australia?
The “bank of mum and dad” refers to financial support provided by parents to their adult children, mainly to assist them in purchasing property. This could include loans or other forms of financial aid.
How much money do you need to buy a house in Australia?
To buy a house in Australia, aiming for a deposit of 20% of the home’s full value is advisable. You can still obtain a loan with a smaller deposit, but it may require Lenders Mortgage Insurance (LMI), which increases the loan cost and prolongs the payoff period.
What is the average house deposit in Australia?
The average deposit required by a first home buyer in Australia is between 5% and 20% of the property’s purchase price. For an $800,000 house, a 20% deposit would amount to $160,000, with the buyer needing to save this amount and borrow the remaining cost.
Can I give my daughter money to buy a house in Australia?
Yes, parents can gift their child money for a deposit to buy a property. This can come from savings, the sale of assets, or an inheritance.
