Are we creating a new housing crisis with the reliance on the bank of mum and dad?

While the so-called bank of mum and dad – aka “the bank” – is not a new lender, it’s centrality to Australia’s housing market has exploded in recent years. In late 2023, a Jarden survey estimated it to be worth over $2.7 billion, tapped into by as many as 15 per cent of mortgage borrowers. Enabling more younger (particularly first) home buyers into the market, and to reap the long-term rewards associated with property ownership, is seen as a positive. But at what cost: both for aspiring property buyers and their unofficial lenders?

Ill-considered strategies

Like all lenders, of course, there are multiple options available to “the bank”, including gifts, advanced inheritances, loans, mortgage guarantees and co-ownership. Some are less well-known than others, making them easier to overlook. All have their own merits and drawbacks. How well are these being weighed up, though? To what degree does the current housing crisis provoke a sense of urgency to dig deep, forgoing proper due diligence?

Lack of documentation

“It’s a family matter – why do I need to put it in writing? ... But I’m happy to help!” Sound familiar? As advisers, it’s our duty to mitigate risk. Part of which means documenting everything. Hence, anyone with access to professional advice is likely to draw up some form of written agreement. What about those who don’t? Are they even aware of the dangers of not having a paper trail?

Relationship tensions

Money is often the cause of relationship tensions; the more money involved, the greater the potential for tension. Couples may disagree over how, and even if, to support their adult children’s property ambitions. This complexity multiplies where stepchildren are involved. Advanced inheritances can generate conflict around perceived “fairness”. Do siblings receive equal amounts? Even when time lapses see the dollar devalued and property prices soar? Or their incomes are vastly different? Do gift recipients receive less in the will, or nothing? While funds typically change hands when everyone is on good terms, what happens if there is a falling out? If the buyers split up, how are matters to be settled with “the bank”?

Financial costs

The actual cost to “the bank” can vary greatly, depending on what support is provided and how circumstances change over time. Loans towards the deposit may not be repaid in full, meaning the loss of both the principal amount and interest earnings. Access to a full or part pension may be impacted. Mum and dad lenders who stipulated fixed interest levels when official rates were at record lows would now be hurting (unless that rate had been pegged to RBA movements). Retirement earnings may be impacted if assets are sold to provide the funds, especially if sold on the cheap or in a market lull.

Forced sales, bankruptcies

The worst-case scenario is that one or both parties go broke. Should first home buyers find they can’t afford to retain the property, a forced sale occurs, potentially at a loss, leaving them worse off financially than before they started. Where do they turn for help? Back to “the bank”. For parents who underestimated their retirement funding needs or subsequent illness or other factors increase their expenses, they, too, may find themselves forced to sell. Should the children’s mortgagee take possession and call in the guarantee, both generations may suddenly find themselves homeless. If “the bank” operates a business, its cash flow and even ongoing viability may also be affected – potentially cutting off their income and retirement nest egg in one hit.

Lifting the veil

I’m not necessarily advocating for or against the bank of mum and dad. There are obvious benefits to younger generations being supported onto the property ladder. And many people are happy to assist their kids – even considering it as part of their legacy. What is needed, however, is more robust discussion of the issue; greater awareness of the various options, potential drawbacks, and risk mitigation strategies available.

Ultimately, only time will tell whether this lender of last (or, perhaps in some cases, first) resort is a sustainable tool in tackling the current housing crisis, or if it is merely laying the foundations for the next one.

Helen Baker is a financial adviser and author of “On Your Own Two Feet: The Essential Guide to Financial Independence for all Women”.