If I asked you to name Australia’s fifth largest lender for first home buyers you might say a big bank. But you’d be wrong. It’s the Bank of Mum and Dad – with parents collectively lending $65.3 billion to help their grown-up children.
Research by comparison site Mozo found one in three parents have helped their children buy a first home, and the most popular option is to let kids live rent-free in the family home while saving. 41 per cent of parents are dipping into their own pocket to contribute towards their child’s first home deposit.
The worrying aspect is that many families aren’t rolling in cash. So parents need to be aware of pushing themselves into financial stress to help out their children.
That said, I’m a big fan of home ownership, and it’s natural to want to give your children the best start possible. It’s possible to find a way to suit everyone.
Life expectancy is increasing, and if you’re a parent there’s a fair chance your children won’t inherit your wealth until they’re in their 60s. So if your retirement plans are secure, and you have some spare cash, instead of investing it in a savings account where the average ongoing return is a meagre 1.82pc, an alternative is to lend the funds to your kids at a rate between what you would earn on a term deposit and the interest they would pay on a mortgage.
It’s sensible to have the arrangement legally documented, but if it works, you’re not compromising on cash returns, and your child is benefiting from a discounted lending rate, giving them a great head start in life.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.