Did you know the Bank of Mum and Dad (BOMD) would be Australia’s 9th largest lender if it were an actual bank? These latest figures from Digital Finance Analytics also suggest the average funding from parents is almost $90,000!
I can imagine a TV advertising campaign for the BOMD with catchy backing music from the Beatles: It starts with “Money (That’s what I want)” from the kids, followed by “I want to hold your hand” as the parents’ response.
But when the kids can’t make the loan payments, “We can work it out” might be more appropriate.
My good friend Brenton Miegel recently posted a blog here about how parents can help kids build wealth for their future but below I aim to expand on some considerations for parents before entering a BOMD arrangement.
Firstly, you need to be able to answer these questions:
Is the money expected to be repaid (is it a gift or a loan)?
- If it’s a gift and the borrowers (kids) have other loan arrangements, the banks will often require a Statutory Declaration saying so. Therefore, what does this mean for your other kids? It may also trigger a Deprived Asset ruling for Centrelink so are you also prepared to have your Age Pension affected?
- If it’s a loan, what are the terms? This includes an interest rate, amortised loan schedule, written agreements between parties and a loan term. Are you up for “The Long and Winding Road”?
How are you limiting your exposure?
- Are you providing a guarantee and is there a limit? Often parents end up providing a Security AND Servicing guarantee which means not only is your home exposed, but so is your future income. Remember, if you guarantee $50,000 on your home, the bank can’t sell a portion of your home to get the money back; they sell the lot and leave you with the residual funds. Pretty hard to “Get Back” to where you once belonged.
Can all parties actually afford it?
- If you are providing a loan, can they afford it? Ask why it is they can’t get a loan through the various banks.
- If you are providing a gift, can you afford it? Your financial future will deviate so what does that mean? It’s the slippery slide of “Helter Skelter” if you run out of money.
- What happens if your money is squandered and they ask for more? There has to be some boundaries set.
Are there other less problematic ways of helping?
- Don’t be too ready to provide the loan, gift or guarantee of your home security. Kids tend to ask for what they need the most, based on that the bank has told them. Find out what the actual needs are. In some cases, you may be putting up your security because their credit cards balances/limits are too high. If you actually help pay off a credit card with higher interest, they have more capacity to save more deposit.
- Don’t get cornered into a transaction last minute, like kids buying a house with not enough to settle, screaming “Don’t let me down”. This often happens because parents have offered to help their kids out but not made it clear what level of help. These conversations need to be very clear and well in advance of those crunch moments…
Secondly, there is no perfect way to set these arrangements up, nor to be completely protected; there’s many solutions so it’s a matter of being educated and defining which option is best for you. Financial planning can help with this and also provide clarity rather than navigating your emotions through an opaque lens.
Speak to your financial adviser for help. Don’t get caught completely underwater, singing “We all live in a yellow submarine”…