Kochie's warning for every Aussie parent
Australian finance expert David Koch has warned parents to think twice before offering financial assistance to their adult children who are thinking of buying their first home.
With many young Australians looking to buy property turning to the “Bank of Mum and Dad” for financial help, Kochie has advised parents to approach this with caution, structured agreements, and clear communication, to reduce the risks and protect both parties involved.
“The Bank of Mum and Dad provided $2.7 billion to their adult children to buy property over the past year," the finance expert said on his latest column in The Nightly
He encouraged a structured approach to navigating the common intergenerational finance practice, and added that financial assistance from parents has become a significant player in the housing market.
“If it was an actual bank, it would be somewhere between the fifth and ninth biggest mortgage lender," he said, referring to an estimation by the Productivity Commission.
He then warned against the casual approach that is often taken, saying: “We all want to help our kids … But the question is what that help looks like.”
“Treat the loan as a business transaction and draw up a formal agreement between each party outlining the terms of the deal, including a set repayment schedule,” he emphasised.
Kochie also drew attention to the University of Newcastle’s findings on the increased risk of financial elder abuse associated with parental assistance.
“Borrowing from the Bank of Mum and Dad encourages ageist attitudes, which leads to kids financially abusing their parents," he quoted the study.
He then differentiated the different forms of financial assistance, explaining the difference between gifts, loans, and guarantees.
“If your child is married or in a de facto relationship and it ends, gifts will usually be considered part of the family assets and divided up in court,” he warned.
He also offered guidance on parental investments in entrepreneurial ventures, advising parents to “think of your role as that of a regular investor."
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