What every parent should read before becoming the bank of mum and dad

In late 2023, economists Jarden estimated 15 per cent of mortgage borrowers received some form of financial support from their parents. A separate poll by comparison site Finder around the same time put the figure at 11 per cent. Fast forward to February this year, with a UBS survey suggesting almost half of first home buyers receive parental assistance. Clearly, the Bank of Mum and Dad is a rapidly growing source of funds for younger people seeking to purchase property. However, some older Australians are now paying a hefty price for having done so without adequate planning and protections.

On the hook

Amid the excitement of homebuying, many parents overlook the fact they could be left on the hook to cover any shortfall. The worst-case scenario here is losing your own home, as well as your child losing theirs, if you went guarantor on their loan and they defaulted and you didn’t have a backup plan. If you loaned them money which they subsequently can’t repay, the principal amount goes unrepaid and you also miss out on the interest/compound growth that money could have earned if invested elsewhere. You may even be asked to fork out more in future if your child needs help to keep the property or to subsequently buy a replacement property. Unlike for a real bank, there is no public bailout for the Bank of Mum and Dad.

Financial shortfall

A common problem that I and other financial advisors are now seeing is parents inadvertently giving their children more than they can actually afford. Take people who acted as Bank of Mum and Dad before the pandemic hit. They budgeted how much they would need for retirement and then gave their adult kids money towards buying a home of their own. Then COVID-19 arrived. Countless jobs were lost and businesses shuttered. Many would-be retirees were forced to stay in the workforce for longer than planned. Next came the inflation crisis, with mortgages and living costs soaring. Retirement budgets blew-out as more money was suddenly needed for everyday expenses, particularly energy, insurance and food. Meanwhile ballooning house prices over the pandemic years saw first homebuyers needing even larger deposits. That all translated to significant financial shortfalls for the Bank of Mum and Dad.

Elder abuse

Government figures from 2023 estimate one in six older Australians suffer elder abuse in some form, with 2.1 per cent experiencing financial abuse – undue control, pressure or restricted access to their own money and financial decisions. Half (53 per cent) of elder abuse perpetrators are family members, with adult children the most common offenders.

Given the amount of money involved in property purchases, and the stresses associated with housing affordability, the potential for the Bank of Mum and Dad to suffer elder abuse is alarmingly high.

Relationship breakdowns

Money is perhaps the greatest source of tension in relationships. Usually that is between partners, yet these can multiply for the Bank of Mum and Dad and its stakeholders. Some examples include:

• You and your partner disagree on what or how much assistance to provide.
• Your other children feel disadvantaged if they don’t receive the same financial assistance.
• Having provided the finances, you then interfere in how your child manages the property or their general finances, causing resentment to build.
• A marriage breakdown (yours or your child’s) affects the repayment of a loan or the nature of a mortgage guarantee.

Protect yourself

While supporting children is the foremost concern of the Bank of Mum and Dad, it is important to protect yourself too. A written agreement outlining the nature of the support, conditions and contingencies is crucial to keep every aligned. Independent advice from your financial adviser, lawyer, mortgage broker and accountant ensures you fully understand what you are on the hook for, how much you can afford to contribute, and whether there are less-risky options.

Finally, be sure that the decision to support your child’s property ambitions is your own and that you aren’t coerced into it. If you’re concerned that you may be experiencing elder abuse, call the free elder abuse line on 1800 353 374.

Helen Baker is a licensed Australian financial adviser and author of the new book, Money For Life: How to build financial security from firm foundations (Major Street Publishing $32.99). Helen is among the 1% of financial planners who hold a master’s degree in the field. Proceeds from book sales are donated to charities supporting disadvantaged women and children. Find out more at www.onyourowntwofeet.com.au

Disclaimer: The information in this article is of a general nature only and does not constitute personal financial or product advice. Any opinions or views expressed are those of the authors and do not represent those of people, institutions or organisations the owner may be associated with in a professional or personal capacity unless explicitly stated. Helen Baker is an authorised representative of BPW Partners Pty Ltd AFSL 548754.

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