Bank of mum and dad: Hidden dangers of family loans
Growing up, my parents – like many – often said “no” to buying me the “must-have” thing of the moment, sternly remarking “no you can’t have that, we aren’t a bank Jess!”.
Fast forward a few decades and it turns out, many parents today are becoming the go-to bank their kids are turning to for help.
You may have nervously watched on as wage growth slowly trudged forward, while house prices soared skyward.
You fielded calls from your adult kids – stressed, frustrated and despondent about their property goals slipping further and further out of reach.
Jokes were made about why you didn’t see this coming and buy them a house when they were in kindergarten.
More and more of you are heeding the cries for help and stepping in (or should I say coughing up?) financial support to give your kids a fighting chance to get on the property ladder.
While helping out the next generation isn’t exactly new, the sheer number of parents who have now added “accidental backyard banker” to their resume has increased at a rapid rate.
The everyday suburban “Bank of Mum and Dad” is now one of Australia’s largest lenders.
Research from Compare Club’s biannual Bill Stress Index shows that one in five parents has already gifted or loaned their kids over $75,000.
And almost half (47 per cent) surveyed are considering giving similar financial assistance to buy property.
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“We’re seeing a fundamental shift in how younger Australians are entering the property market,” Compare Club research head Kate Browne said.
For many first-home buyers, it’s a generous but essential lifeline needed to get a foothold on the ladder.
In December 2024, the national median dwelling value reached $815,000 – a daunting figure for many first-home buyers.
For context, Core Logic’s recent research shows the “affordable” purchase price for the median-income household is about $513,000, leaving a $302,000 gap that most can’t bridge without help.
Parents often provide financial support in two key ways: By gifting or loaning cash to help with a deposit, which can reduce the loan-to-value ratio, or by becoming a guarantor, leveraging their home equity to help their child avoid paying lender’s mortgage insurance.
Offering help can have pitfalls – families are complicated at the best of times, throw money into the mix, and it can get messy fast.
Then consider what many parents are actually risking to make it a reality for their kids – financial security. So it’s a decision that needs to be carefully considered before any levers are pulled.
Take into consideration all the risks with becoming the bank of mum and dad. Photo: Shutterstock
The risks to consider
Here’s what you need to think through before offering up help:
Erosion of retirement savings
Parents often ask me how they can best financially support their kids and my answer is always the same: One of the most helpful things you can do for your children is ensure you yourself are financially secure.
Yet, as many are dipping into their superannuation or savings to provide cash gifts, I am often left worried that they haven’t fully considered what it will mean for them in their golden years.
With Aussies living longer, you want to be confident that any amount you are giving isn’t going to leave you short down the track.
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Also, be aware that financial gifts might affect your eligibility for the age pension, so it’s worth seeking advice before making a decision.
Guarantor gamble
Acting as a guarantor means you’re essentially putting your home on the line. If your child defaults on the mortgage, the lender can pursue you, the guarantor, to recover the shortfall.
One in, all in?
If you have more than one child, it’s important to think about equality.
Supporting one child financially could create expectations among others or even resentment if handled without transparency or planning.
If the time comes and each child knocks for financial help, can you support them all?
For loans, consider formal agreements to set clear expectations.
And if you’re giving an early inheritance, seek legal advice to ensure fairness across the family.
Get expert advice, have radically transparent conversations with all members of your family and think carefully about any unintended consequences it may throw up and deal with them ahead of time.
Helping your kids into the property market is an incredible act of generosity, but it’s also one that requires careful planning.
It’s not just about providing a lump sum or swiftly signing on as a guarantor; it’s about setting everyone up for long-term success – without jeopardising your own.
The Bank of Mum and Dad isn’t likely to be closing up shop anytime soon. But, like all good banks, lending considerations need to be carefully thought through.
Whether it’s exploring ways to help, having honest conversations about boundaries, or seeking advice from financial and legal experts, there are steps you can take to help your kids while ensuring your own financial security stays intact.
After all, the best legacy isn’t just helping your kids buy their first home, it’s showing them how to navigate financial decisions thoughtfully, so they can stand on solid ground for years to come.
Jessica Brady is a qualified financial adviser and leading money expert. She is on a mission to educate and empower everyday Australians to be better with money through her online money programs and via the Financially Fierce Podcast.
This article first appeared on View.com.au. Read the original here
