Our Mum and Dad bank is big, busy and complex
IT'S called the Bank of Mum and Dad, and it's big, totally unregulated, open all hours of every day and it's right in your lounge room.
The mum and dad bank isn't new, but the consequences for Australia's ageing community which is living much longer is new and worrying.
Digital Finance Analytics principal Martin North says the 'bank' is the eleventh largest lender in Australia, ahead of AMP Bank, HSBC and most of the community banks and mutuals.
"We estimate at least $16 billion is outstanding with the Bank of Mum and Dad, and it is growing fast," Mr North reports.
The typical age band of the lenders is between 45 and 65 years. "Within that, the peak would be around 55 years," Mr North said.
"Essentially, it is households who have had their kids grow up, probably leave home, the kids are in their mid-20s to mid-30s and they are still not able to get into the marketplace.
"It's partly because people are getting mortgages later in life because it is so much harder to get them and mortgage prices have gone up a lot.
"But there are some people who are already in retirement, above 60, who are also still doing the 'bank of mum and dad' trick."
Formalising the arrangement
Not everyone remembers the importance of formalising financial arrangements with their children, making sure the basis of the loan is clear as to is it a gift or a loan, is there an expectation of repayment of the loan and any interest on it. Many do it informally which can lead to significant financial issues down the track.
"I notice in some cases there isn't even an agreement as to how the repayment will be made," Mr North said.
"I think some kids would regard (the loan) as bringing forward the inheritance; almost not expecting to repay it.
"What happens if the child remarries and somebody is in the property. And, what if they can't make the repayment down the track. There is a whole bunch of questions that come out."
Mr North says new buyers are more reliant on assistance from parents. "This can create intergenerational pressure with older home owners perhaps giving away value which should be part of their retirement nest egg, and younger buyers holding additional debt obligations below the water line," Mr North said.
"There is also a bit of peer pressure if you have two or three kids.
"If you give money to the first one, when the second kid says 'well you gave it to number one, I want it to', and then number three comes along and says what about me."
He also highlights the looming debate of those with parents who can afford to make family home loans and those that can't.
Is there an end to the hand-outs?
Mr North's analysis also suggests that children who receive loan assistance are more likely to get into financial difficulty later, because he says, "they are used to being bailed out and used to having someone else sort out their problems rather than having to work it out themselves".
"It might be an easy thing to do or it might be a hard thing to do, but is it a sensible thing to do? I'm not sure it always is," he adds.
What about your financial future?
Before making a loan, Mr North recommends a parent look at their financial needs, what their asset portfolio looks like and what they think is their life expectancy.
"Then think about the financial consequences if the interest rates rise and house prices were to fall," Mr North said.