Parents are increasingly bankrolling their offspring’s first foray into the housing market, but experts warn of potentially disastrous consequences if the “bank of mum and dad” becomes the norm.
First home-buyer numbers have soared across Australia in the past year, with the number of young buyers relying on parents to help fund purchase also increasing.
Digital Finance Analytics says the “bank of mum and dad” is now the 10th-largest lender in Australia, with an estimated 55 per cent of first-time buyers getting help from their parents.
The rise in first home-buyer numbers is often attributed to stamp duty concessions introduced in NSW and Victoria last July.
Australian Bureau of Statistics data for February found first home-buyer numbers were up across the country (except in Western Australia, where they fell 0.1 per cent year-on-year). The ACT led the way, with a 177.7 per cent rise in first home-buyer commitments, followed by NSW (up 103.3 per cent), Victoria (38.6 per cent), the Northern Territory (26.8 per cent), South Australia (17.8 per cent), Queensland (3.8 per cent), and Tasmania (2.2 per cent).
Steven Rowley, director of the Australian Housing and Urban Research Institute’s Curtin Centre, said a “dislocation between income and housing prices” was prompting first home-buyers on low and medium incomes to look for other ways to fund deposits.
“There’s a large part of the housing market that is unaffordable. It’s clearly a problem when younger people are not able to access home ownership through their own means,” he said.
“The proportion of people relying on their parents to enter the property market is growing, and it will lead to growing inequality.”
Dr Rowley said the continued reliance on parents’ money would lead to a housing market of “haves and have nots”.
“There are an awful lot of people who are not in a position to lend their children money, so you will get further inequality between children who can access this money and those who can’t,” he said.
There are also ramifications for parents who feel pressured to take on additional mortgages to fund a child’s first home, with potentially disastrous consequences.
“If you do retire and you can’t pay off that mortgage, it puts your own property in danger. In certain circumstances, it’s sustainable, at other times it’s not,” Dr Rowley said.
“The last thing a child should want is to see their parents in financial difficulty as a result of having lent them money.”
The issues are also familiar to Taj Singh and Daniel Cohen, who co-founded First Home Buyers Australia over a beer at the pub, after bemoaning the lack of specialist assistance available to first home-buyers. Mr Singh said they regularly had clients who were relying on parents to buy a house.
“We’re seeing a push towards that because parents are seeing it’s increasingly difficult for their kids to afford a home,” he said.
Assistance often came as a cash gift or by parents agreeing to act as guarantors. The “bank of mum and dad” was a preferable alternative for many first home-buyers, who would otherwise have to pay for lenders’ mortgage insurance (at higher interest rates), Mr Singh said. But there were issues.
“There’s always a risk of a breakdown in the family or a divorce between the kids, that may lead to legal disputes and issues,” Mr Singh said.
The parents might also find their own home at risk if their child could no longer pay their mortgage.
Australian Institute of Conveyancers national president Shane Jacob said using parents’ money had numerous potential pitfalls. But parents could take steps to ensure they did not lose if relationships soured.
“It is possible for the parent to be registered on title along with their children, if they wish to protect their interest in the property,” he said.
“If this is the case, it is critical the parent/parents are also noted on the contract to avoid any additional duty being paid.”
Anyone in these circumstances should engage a professional conveyancer early in the buying process, to ensure there were no surprises and that decisions on equity and ownership were made ahead of a contract being signed, Mr Jacob said.
It was also crucial to ensure that any money promised by parents was available before the contract was signed.
“The buyer should have absolute certainty that they will have the funds available to meet the contracted terms on the specified dates,” Mr Jacob said.
“The first home-buyer may have to scrape around for funds or, even worse, face penalties for a breach if they are expecting instant access to money that is tied up in fixed terms or in a super fund.”