Yahoo Finance David Koch's warning to guilt-tripped Boomers: 'If you're the bank, act like one'
He said things can get messy if parents aren't careful with handouts to their kids.
Australian parents are being warned not to go too soft on their kids if they're lending them money for a leg up onto the property ladder. Figures from the Productivity Commission revealed Aussie parents gave a whopping $2.7 billion to their kids last year for the sole purpose of property ownership.
While it's an incredibly generous act, finance expert David Koch said problems can arise when the Bank of Mum and Dad is utilised and things can get messy. Especially if parents don't take the right precautions.
"As Baby Boomers we’re more than likely to be guilt-tripped into helping financially," he wrote in The Nightly. "We caused the high price of property, we’ve made it hard to save for a deposit, we have all the cash, we don’t have to pay high interest rates, we live a better lifestyle."
Have you helped out your kids to buy their first property? Email stew.perrie@yahooinc.com
"All the same arguments we used at their age on our own parents. The inter-generational wars have literally lasted for generations. Your adult children will be having the same argument with their children."
The Bank of Mum and Dad can come in different forms. Money can be gifted to a child, given as a loan, or parents can act as guarantors for a mortgage.
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Koch said some parents had to switch up their retirement plans because they've chosen to give their kids tens of thousands of dollars.
It's no small chunk of change and Koch said family relationships can fracture when large amounts of money are exchanged or discussed.
If you're playing as a bank, act like one
But he said there is a simple solution parents can use to ensure they aren't left high and dry if things turn sour.
"If you're playing the role of a bank, don’t be afraid to act like one," he said.
Koch urged parents to have an agreement drawn up in writing and even get a lawyer involved to help with the wording to make sure it's airtight.
If it's a loan and you're expecting your child to eventually pay the money back, then having a document signed by both parties helps make sure everyone is on the same page.
"At the end of the day, the most important thing is to communicate. If a payment is late, deal with it straight away and don’t let things fester or become awkward," he said.
According to figures released last year by the Australian Housing and Urban Research Institute, around 40 per cent of Aussies aged 25-34 expect to call on their parents’ help to purchase a property. However, that expectation doesn't necessarily turn into reality.
A Finder survey found just 11 per cent of households received financial assistance from their parents. The average amount? $56,231.
About 35 per cent of first-home buyers said they didn’t receive any cash from their parents, but this included 12 per cent who still received assistance in other ways. Another 36 per cent said they didn’t want their parents to pitch in at all.
Be aware of the risks
If parents decide to act as guarantors, there are a few things to be wary of.
Zippy Financial director and principal broker Louisa Sanghera said there has been an increase in parental or family guarantees because of the high price of properties.
Parents can use equity in their home as security against a loan taken out by their child and that could suit both parties because it's not an upfront cost to either.
Upsides of tapping the 'bank of mum and dad'
Smaller deposit: The borrower won’t need as big a deposit if they are using their family member’s property as security for the loan
Avoid LMI: The borrower can potentially avoid paying lenders mortgage insurance (LMI), which is typically required for deposits that are less than 20 per cent
No cost to mum and dad: There is no cost to the guarantor, as long as the borrower always makes their repayments
It’s not forever: Once the borrower has built up enough equity in their home or has paid off enough of the mortgage to achieve an 80 per cent loan-to-value ratio, the guarantor can be released from the agreement
Downsides of tapping 'bank of mum and dad'
Mum and dad are liable: If the borrower defaults on their mortgage, the guarantor will be liable for the entire sum they have promised to cover
Impacts borrowing power: The guarantor’s ability to take on further loans for themselves or guaranteeing others (say other children) will be diminished during the guarantee period
Risking own home: The guarantor may also put their own home at risk if the borrower defaults on their mortgage and they are unable to repay the agreed sum
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