Life is getting expensive and saving for a home deposit isn’t getting any easier!
With first home buyers feeling the struggle, parents in fortunate financial positions sometimes consider reaching into their savings, using home equity or going guarantor to support their kids in securing their first home loan.
Parental contribution is on the rise, with parents contributing around $90,000 per child on average, a 20 per cent increase compared to 2021. The ‘Bank of Mum and Dad’ has become Australia’s ninth biggest mortgage lender.
So what are some of the risks involved in deciding to offer up support as the ‘Bank of Mum and Dad’?
Age Pension entitlements
If you are eligible for the age pension, supporting your kids financially could have a significant impact on your payments.
Any money, income, or assets above the ‘allowable disposable amount’ that you have gifted in the past five years may count towards your assets and income test. These limits are $10,000 in any one financial year or $30,000 over five financial years.
Alternatively, you might consider loaning funds to your children and this will be treated like any other financial asset you own. As with all types of family agreements, we advise that you seek legal advice to document the loan.
Impacts on retirement
Supporting your kids with a home deposit may mean that you are foregoing the opportunity to grow and earn money on your savings. Withdrawing early may mean that you are left with less to live on during your retirement.
As you move closer to retirement, you could find yourself worried about outliving your super. These days, a 65-year-old could realistically spend three decades in retirement, yet many are not accounting for this in their savings.
The risk of going guarantor
Going guarantor is another common way for the ‘Bank of Mum and Dad’ to provide support without reaching into their pockets.
Being a guarantor involves providing security to guarantee that the lender will get their money back if your child can no longer afford their repayments and defaults on their loan. It increases the borrowing power of a first home buyer and helps them avoid lenders mortgage insurance.
The decision to be your child’s guarantor shouldn’t be taken lightly. If at any stage the borrower can’t make their loan repayments, you will have to pay back the entire loan amount plus interest. Your credit report will be affected and you could also lose your home or car if they are used as security on the loan.
Are you willing to take on the risks of becoming ‘Bank of Mum and Dad’?
Signing up as ‘The Bank of Mum and Dad’ to help an adult child purchase their first home can be a very satisfying and rewarding gesture. However, it is important to understand the risks involved.
Always lend them the money with strings attached so you can get it back if you need it in your old age.
Never rely on a verbal agreement between your children and their spouses. Draw up a loan document properly. Put everything in writing with rules about the loan.
This also separates the money from other assets in case the relationship breaks down.
Lending your children money is a decision that could impact your financial future as well as theirs. If you are thinking about helping your kids get into the property market, we recommend seeking financial advice to discuss the right options for your family.
Chat to the team at APS Financial Planning.
Written by APS Senior Financial Advisor, Paul Hatzigeorgiadis.
Paul has over 25 years’ experience in the financial services sector. Over Paul’s history, he has provided advice to an extensive range of clients from wealth accumulators to pre and post retirees advising them on Wealth Creation, Cash Flow management, maximising Centrelink benefits in Retirement, Personal Insurances, Debt minimisation strategies and Superannuation. Paul is married with a 10-year-old daughter and enjoys spending time with family and friends. He especially likes watching his daughter play Soccer for the Northern Falcons FC. Whether it’s assisting clients to meet their short-term goals or working with them over a longer-term, Paul enjoys helping guide his clients with their financial future.