Another day, another article about “how this first home buyer cracked the property market on a single income!”
Of course, those articles often bury the lede which is that the buyer’s parents actually helped them, such as by:
agreeing to be a guarantor on the loan,
allowing them to live with them rent-free until they’ve saved up enough,
gifting them a significant chunk of the deposit, or
buying the whole darn house for them!
Ya gotta post it pic.twitter.com/k6vQMNNxAE— 🤌 arrest norman swan 🤌 (@macaulaybalkan) May 30, 2021
The role of parents in the housing market has indeed become so ubiquitous that 'Bank of Mum and Dad’ (BOMAD) has become a colloquial term coined to describe the increasingly popular source of funds first home buyers are tapping to get into the market.
What is the Bank of Mum and Dad and how many first home buyers rely on it?
The Bank of Mum and Dad refers to parental funding, often to assist with the purchase of a property.
The most common ways parents help are going guarantor on a home loan or providing a cash gift - sometimes with the expectation it will be repaid.
A guarantor home loan allows a close relative (typically a parent) to use the equity in their home as security for part or all of the buyer’s deposit while promising to be responsible for the home loan’s repayments should the borrower struggle. It means the buyer can get away with having little to no deposit and avoid paying costly Lenders Mortgage Insurance (LMI).
Recently, the Bank of Mum and Dad became Australia’s ninth biggest mortgage lender according to analysis by researcher Digital Finance Analytics (DFA).
The research found a whopping 60% of first time buyers are getting financial help from their parents, with parental contributions averaging $92,000 in April 2021 - enough for a 20% deposit in most parts of Australia.
What’s more, the research found the total amount lent by the Bank of Mum and Dad has reached $34 billion, which is more than what actual lenders such as Bank of Queensland, HSBC, AMP, Heritage Bank, Beyond Bank and Greater Bank have in loans.
“Anecdotally, I have heard reports from Mortgage Choice brokers in Sydney who say that 50% of their first home buyer client base are receiving gifts from their parents,” Susan Mitchell, CEO of Mortgage Choice told Savings.com.au.
Indeed, many of the experts I spoke to for this story similarly said about half of their first home buyer clients have had help from the Bank of Mum and Dad in some way, whether that be in the form of a monetary gift or by agreeing to be a guarantor on the loan.
Bank of Mum and Dad fuelling current property market boom?
With property prices booming, (national property prices have risen by more than 10% annually) it’s little wonder more and more first home buyers are turning to the Bank of Mum and Dad to get into the market.
In May, national property prices spiked by 2.2% according to CoreLogic data. In Sydney, prices surged by 3% - the equivalent of $30,000 in a single month, or $1,000 a day.
“This creates a massive hurdle for hopeful buyers because even if they’re doing what they can to save a deposit, high cost of living, lacklustre wage growth and astronomical house price growth prices them out,” Ms Mitchell said.
“Australia’s ongoing housing boom means the Bank of Mum and Dad may be one of the only avenues for first-time buyers hoping to enter the housing market sooner rather than later.”
Ironically, the generosity from the Bank of Mum and Dad may be the very thing contributing to the current sky high prices that first home buyers dread most, says Vince Scully, financial adviser and founder of Life Sherpa.
“It’s hard to assess by just how much but if first home buyers can spend more, thanks to loans from their parents, it will put as they say ‘upward pressure’ on house prices,” Mr Scully told Savings.com.au.
“There are many variables but as the Bank of Mum and Dad is unregulated and likely to grow, its impact may be more pronounced.”
If you take a look at DFA’s data, the number of first home buyers seeking help from the Bank of Mum and Dad bottomed out in March 2020, with just 20% of FHBs using the Bank of Mum and Dad.
Just one year later, the number of FHBs using the Bank of Mum and Dad surged to 60% in March 2021.
If you take a look at how property prices also behaved during that time, you can see house prices started bottoming out in early 2020 as well, before surging again in 2021 as the number of FHBs using the Bank of Mum and Dad also surged.
But it is interesting to see how the surge in FHBs using the Bank of Mum and Dad has coincided with the surge in property prices.
At the same time, the number of first home buyers entering the market also surged to its highest level in over a decade:
First home buyers getting into the market amid surging property prices is a clear sign that many are receiving some level of financial help from their parents, according to some experts.
The most recent research on BOMAD from the Australian Housing and Institute of Urban Research (AHURI) in 2017 found that booming property prices also increased the amount first home buyers received from their parents, because it was easier for parents to draw on the equity in their home.
It certainly appears to be the case now as parents are hardly chipping in small amounts. Recent DFA analysis shows the average parental contribution sits at $92,000, equating to a generous 84% parental contribution of the average first home buyer deposit of $106,743.
Lendi Group CEO, David Hyman agrees that booming property prices are putting more parents in a position to help their adult children.
“The Bank of Mum and Dad has always been around but the current property boom means some parents have more equity in their properties and this puts more mums and dads in the position to consider assisting their kids with more funds,” Mr Hyman told Savings.com.au.
“Although parents want to give their kids a leg up, perversely, the Bank of Mum and Dad could also be inflating property values and making housing less affordable by pulling forward a cohort of first home buyers into the market sooner.”
Director of Montara Wealth, David Hancock said he doubts the current property price boom would even be happening if it weren’t for the Bank of Mum and Dad.
“Without help from mum and dad, many first home buyers would have instead been priced out of the market,” Mr Hancock told Savings.com.au.
“That would have led to lower first home buyer demand and could have put downward pressure on prices. Instead, the opposite is happening.
“Greater first home buyer demand combined with access to larger deposits and lower interest rates is driving up property values.”
The problems with relying on the Bank of Mum and Dad
While borrowing from the Bank of Mum and Dad may be an easy way for first home buyers to leapfrog their way into the market, it’s not without its risks.
According to DFA principal Martin North, first home buyers who borrow from the Bank of Mum and Dad are between three and five times more likely to default on their loans within the first five years.
“You’re twice as likely to default in the first five years if you got help from mum and dad and never got into the savings mindset,” Mr North said.
“A seagull payment is not regarded well, compared with a record of regular savings.”
Risks for first home buyers and parents
The risks of using a guarantor are well documented. For buyers, the enormous financial commitment of asking a loved one to go guarantor for you could put an enormous strain on your relationship, particularly if the deal goes belly up and you can’t make the mortgage repayments.
If this happens, the parent then assumes responsibility for the loan. If they also can’t make the mortgage repayments, it puts their property at risk of being sold to recoup your debt. Not only that, it could also ruin their credit report, making it harder for them to take out future loans.
To avoid this, a guarantor may choose to provide a limited guarantee where they are only required to guarantee a portion of the loan, but Mr Scully says there are still other risks that need to be considered.
“Wherever it comes from, it needs to be clear whether it is a gift or a loan. If it is to be a loan, be clear what repayments are to be made and when. Is interest to be charged? If so, at what rate?,” he said.
“If it is a gift, it may impact your parents’ entitlement to the age pension or other Centrelink benefits. If it is a loan they may have to pay tax on the interest.
“Some parents choose to treat it as an early inheritance and use their wills to attempt to balance out between siblings who don’t get such help. Parents generally seek fairness between siblings above all else.”
Regardless, Ms Mitchell says it’s important to seek independent legal and financial advice before entering into a guarantor arrangement.
“It’s important that both parties have a formal legal agreement in place as a layer of protection if either sides financial situation changes,” she said.
Meet the first home buyers who used the Bank of Mum and Dad to get into the market
We asked three first home buyers who tapped into the Bank of Mum and Dad what kind of arrangement they have with their parents and what they ended up buying.
Bought a two-bedroom apartment in Sydney
When 25-year old Keiran Mannion decided she wanted to buy a home in Sydney, she knew saving a 20% deposit in the most expensive Australian city on a single income would be a nearly impossible task.
“If my parents weren’t able to help support me with their contribution towards my deposit, it most definitely would have taken me many more years to save up what they were able to gift me,” she told Savings.com.au.
Pictured: Keiran Mannion. Image supplied.
“In that case, I would instead have looked at putting down a lesser deposit and buying out of Sydney in a more affordable city.”
Her parents matched the deposit she had saved, allowing her to put down a 20% deposit and avoid paying LMI.
“They aren’t guarantors for the property, it’s completely in my own name.”
She says she’s not worried about the risks of borrowing from the Bank of Mum and Dad, despite statistics showing adult children who borrow from their parents are three to five times more likely to default on the loan.
“It doesn’t concern me as I only borrowed within my capacity and didn’t leverage my parents to get a loan,” she said.
“My repayments are realistic in terms of my salary. I’ll eventually look for a housemate to rent out the second bedroom which will help contribute to the repayments.”
Though she’s thrilled to finally be a homeowner, she says the house hunting experience was “tough and competitive”.
“It was frustrating going to an inspection on a property that was initially within my reach, only to see it eventually sell for anywhere from $50,000 to $150,000 more than what that asking price was.
“I can imagine for someone who doesn’t have the same sort of support and process assistance that it would be even more daunting as a first home buyer, particularly considering the current state of the market and the competitiveness.
“I’m really proud of the hard work I’ve put in to achieve this milestone.”
Bought a $1.4m farm in Queensland
As self-confessed mature first home buyer, the road to home ownership has been a pretty different one for Sally Broad and her partner Luke.
The former Melburnians recently joined thousands of Aussies who have made a regional move post-COVID to rural Queensland where they bought a 122 acre turf farm for the sum of $1.4 million.
Pictured: Sally Broad and partner Luke Newman. Image supplied.
“This is my first home but my partner did own our previous house, but both purchases were assisted via the generosity of his mum,” she told Savings.com.au.
“We wouldn’t have been able to get our three boys out of suburban lockdown hell if it weren’t for her assistance with this purchase as I lost my corporate job during the first lockdown and obtaining finance was difficult.”
Despite being on an income of between $150-$250k while her partner earned $65k on top of that, she says saving up for a deposit was still a struggle because they had childcare and debt to pay off.
“We had experienced a combined total of 15 years of childcare fees for our three boys which I have conservatively estimated at $320,000 of after tax income and after the childcare subsidy,” she said.
“I had also been clearing personal debt incurred years prior so with childcare, debt repayments, rent which averaged $2,200 a month and living expenses, there wasn’t much left going into savings.”
Sally and Luke wanted to purchase a property in rural Queensland that was both residential and had a business that Luke could run and be employed in, but with only one income between them, they struggled to get mortgage approval for the loan type and amount required.
“To be honest I would say that no broker we spoke to really had a good grasp of any type of mortgage situation outside the standard residential type loan. Banks we spoke to could also not decide where we fit and COVID-19 didn’t have a positive impact on their flexibility,” Sally said.
“We had calculated the repayments required to service the mortgage we needed and it was clear we could afford them based on historical financial statements and projections, but the uncertainty of the time meant lender conservatism was high.”
Fortunately, Luke’s mum came to the rescue and offered to loan the couple the amount they needed.
“We are treating this like a legitimate loan and have a repayment agreement with terms and conditions.
“We don’t feel it is anything different than a mortgage with a bank however we suspect our ‘lender’ is a little nicer to deal with which also means we are probably more scared if we mess up! We have a schedule of monthly repayments via direct debit and essentially the goal is for the process to run automated in the background and hopefully we won’t need to have any difficult discussions anytime soon.
“Of course we are worried about defaulting because we are acutely aware that there is a chance if it happened that it wouldn’t have just a financial impact but also a personal impact.”
Bought an investment property in Melbourne
When first home buyer Callista Clements decided to purchase an investment property in Melbourne with the help of Accrue Real Estate, she knew she’d need the financial support of her parents.
“With my HECs debts and expenses in a car and moving out of home, it would have taken me ten years to save for a minimum deposit and impeded my plans to travel and have other life experiences,” she told Savings.com.au.
Pictured: Callista Clements. Image supplied.
Her parents “part gifted, part loaned” her the money she needed for the deposit.
“They were keen to support me having a property while it was still within reach financially,” she said.
“I am planning on using the rental returns initially to cover the investment, and when I eventually move in it will be my responsibility to pay them back at set amounts from my salary.”
While she says she was initially concerned about her ability to make the repayments, the advice she received from Accrue eased her worries.
“The sustainability of the loan and repayments was a primary concern (but) we have modestly calculated the rental return and made a wise purchase with support of Accrue, so it removed any concerns or arguments and subjective opinions as we had sound advice to plan on.
“The market is incredibly tough and unrealistic - so the advice of Accrue and option to purchase with investing in mind first, and living in it later, has removed many of my initial expectations and demands so it has been an easier purchase.”
Photo by Maximillian Conacher on Unsplash