Borrowing from bank of Mum and Dad could kill home loan application
The bank of mum and dad is under threat. Ranked as one of the top 10 lenders in Australia, based on figures from the regulator APRA, reliance on the bank of mum and dad (BOMAD) became widespread for first home buyers in a rising market.
A year ago as many as 60% of first home buyers were getting help from their parents, according to Martin North, founding principal of Digital Finance Analytics.
His research revealed that this equated to 22,000 first home buyers.
But this rate has since plummeted to 20%. Over the same time, the average amount that parents cough up to help their kids dipped from $88,000 to $75,000.
The bank of mum and dad faces tougher prudential controls amid concerns that careless lending could endanger not only the financial wellbeing of the borrower (the kids) but also the lender (the parents).
A few years ago, banks didn't look too closely at a one-off contribution from the BOMAD. It was counted as part of the deposit and banks simply required a letter stating whether it was to be paid back, either partly or in full, or if it was a gift.
But lenders have woken up to all the consequences of a loan from the BOMAD, says North. They are reluctant to lend, and a "seagull" payment is not regarded well, compared with a record of regular savings over time.
First home buyers with a BOMAD loan that makes up a sizeable part of the deposit find that some banks won't take it into account at all, scuppering their plans to buy a home. The banks tell them to come back when they have saved more from their own income.
There are other forces at work, too, says North. "Parents are more concerned in a falling market about the equity in their own property, and whether it will erode, when facing retirement."
He says the parental "ATM" has run dry. "They cannot afford to pass money down the generations now."
Also with soft house prices, many first-time buyers prefer to wait, rather than enter a falling market and risk losing their deposit. This is despite the availability of some state-based incentives for first home buyers, such as those in the Northern Territory that commenced in May.
Certainly there can be a problem with propping up your kids to get into property because they don't have the discipline to make repayments on the mortgage. North says that those who get help from parents are twice as likely to default in the subsequent five years compared with those who have saved.
"My expectation is that we will see this trend continuing and it will be the end of mum and dad. Some 10%-15% of equity has gone for first property owners who bought 18 months ago."
APRA is concerned that parents are being pressured into providing funds for their adult kids, which can create big financial liabilities for them in their retirement, particularly if their kids' relationship breaks down or they fall behind on their mortgage repayments.
There are a number of lawsuits by parents who have been disadvantaged by bankrolling their children without using lawyers or understanding the terms and conditions in the contract.
If you do still want to lend to, or go guarantor for, your adult kids, under the Banking Code of Practice that commenced on July 1 you can expect to face more scrutiny from banks.
You will need to provide more information about your awareness of responsibilities and how the arrangement will affect your own finances. For example, you will need to show you obtained legal advice or reviewed the documentation setting out the terms and conditions.
Certainly, parents need to do their sums. North says that instead of a big lump sum, ongoing support may be better.