Buying a first home is a significant milestone, but with rising property prices, it’s becoming increasingly challenging.

Enter the “Bank of Mum and Dad” – where parents provide financial assistance to their adult children to give them a leg-up into the property market, and perhaps, encourage those same children to move out of the family home!

While it’s a generous act, it’s not without its complexities. Let’s explore the advantages and disadvantages of using the Bank of Mum and Dad for purchasing a first home.

Advantages

1. Boosted Deposit: The primary advantage is the ability to increase the deposit amount, which can enhance borrowing power and potentially access to better mortgage deals.
2. Avoiding Lenders Mortgage Insurance (LMI): With a larger deposit, there’s a potential to avoid or reduce the cost of LMI, saving significant amounts over the loan’s lifetime.
3. Immediate Homeownership: The Bank of Mum and Dad can enable buyers to enter the property market sooner than they would have been able to on their own.

Disadvantages

1. Complexity in Loan Approval: Accepting money from parents can complicate the loan approval process. Lenders may require the Bank of Mum and Dad to provide a declaration to the effect their loan is not repayable. If the loan is repayable to the Bank of Mum and Dad, the primary lender may require a loan agreement to understand the capacity of the child to service their mortgage. An alternative may be for Mum and Dad to pledge additional security by acting as guarantors for their kids. Not all lenders offer products that allow for a family pledge.
2. Potential relationship strain: Money matters can strain relationships, especially if agreements aren’t clear or circumstances change.
3. Financial risk for parents: Parents may risk their financial stability, especially if they lend more than they can afford or need the funds for an emergency.
4. Inequality among siblings: If there are multiple children, gifting funds or lending to one can lead to disputes or expectations of similar support for others.
5. Age pension implications: When parents gift or lend money to their children, the impact on the parent’s age pension entitlements cannot be ignored. If the money is a genuine loan to a child, it will continue to be treated as an asset of the parents, even if the loan is provided on an interest-free basis. Alternatively, if the money is gifted to a child, it will generally continue to be subject to the income and assets tests for a period of five years from the time the gift was made.

While the Bank of Mum and Dad can be a lifeline for first-time homebuyers, it’s essential to navigate this path with caution. Both parties should consider legal and financial advice to ensure clarity and protect their interests. Ultimately, the decision to use the Bank of Mum and Dad should be made with a thorough understanding of the potential benefits and pitfalls.

By Peter Kelly on 31 July 2024

ABOUT PETER KELLY

PK believes people have the right to accurate, affordable and unbiased information that addresses all aspects of their preferred retirement lifestyle, thereby giving them the opportunity to make informed decisions that will empower them to live out their lives with dignity, certainty and security.