Despite the Turnbull government encouraging families to help their children into their first homes, relying on ‘the bank of mum and dad’ has serious pitfalls.
Research from the Reserve Bank of Australia has found that first home buyers getting help from family and friends was more likely to lead you into trouble than doing the hard yards of making your own way.
The RBA research showed that people using family help to buy a home had a 31 per cent likelihood of suffering financial stress, whereas the hardy souls who did it alone had only a 19 per cent likelihood of hitting trouble.
And of those who did tap family and friends to buy, 23 per cent had to go back for a top-up when things got tough later on. For those who did it alone, it was only 11 per cent.
The figures do not surprise David Simon, principal of independent financial planning group Integral and a bank employee for 16 years.
Mr Simon said a change in financial culture, partly driven by the banks, meant that younger people were getting loans when they were not financially or emotionally prepared to manage them.
“In the past, the banks demanded a significant deposit and evidence of your savings history and that was back when interest rates were over 7 per cent, not under 4 per cent,” Mr Simon said.
“They wanted a 20 per cent deposit and proof that you saved it. You wouldn’t get the deal if it came from friends and family.
“There was a significant relaxation of those rules from the mid 2000’s.”
Before the global financial crisis it was possible to get loans with deposits of as little as 5 per cent, he said.
As the following chart shows, those who did get help after making their purchase seem to have spent it on utilities and mortgage repayments. Those with help reported higher levels of stress in those categories than those without help.
But when it came to doing the hard stuff, those who did it alone led the way. They were more likely to have pawned a possession or gone without a meal than those who had help along the way. When it came to going on welfare or doing without heating, there was no difference between the groups.
The bank of mum and dad is growing in importance as house prices increase. The above chart shows that over 40 years the percentage of people getting help to buy property has more than doubled from 6.3 per cent to 13.9 per cent.
Given property prices have risen dramatically since 2014, the figures could have risen further.
Denis Nelthorpe, CEO of legal service West Justice, said: “There are two things happening. The costs of housing are so great that couples with very good jobs and prospects struggle to meet the mortgage criteria so banks are becoming a bit more understanding.
“The other thing is where this is possible, families are providing most of the deposit and people are struggling to meet the high mortgage payments week in, week out.
“The current climate is encouraging people to extend themselves more than they should and they need the assistance of parents.”
Added to this is a report from investment bank UBS which found that 33 per cent of people were lying on mortgage applications which meant there was about $500 billion in loans based on false information.
“While household debt levels, elevated house prices and subdued income growth are well known, these findings suggest mortgagors are more stretched than the banks believe,” UBS said.
That adds to the level of vulnerability of people in the face of interest rate increases or economic downturns.