Source : THE AGE NEWS
The bank of mum and dad appears to be moving increasingly from a mortgage lender to an ATM – a cash provider to bail out families trapped in the cost-of-living crisis.
With many younger Australians struggling financially, there are signs the unofficial and unregulated shadow banking system known as the bank of mum and dad is becoming more crucial as a source of funding.
The bank of Mum and Dad.
Credit: Simon Letch
New survey figures suggest the most frequent financial assistance provided by family (mostly parents) was targeted at helping with living expenses. This is a deviation from the traditional bank of mum and dad purpose, which has been to lend children money, or gift it to them, for a deposit on their first home.
After living expenses, the second most popular use for cash from family was to help with mortgage interest payments, and the third was to assist with buying a home, according to the UBS survey on the bank of mum and dad.
But the size of the amounts provided by (mostly) parents to get a foothold in the property market was particularly notable: the bulk of these transfers were greater than $100,000 and many were in excess of $200,000.
“Although the magnitudes varied, we find that ‘bank of mum and dad’ payments to children are regularly above $200,000,” the survey report said.
The bank of mum and dad has been estimated to be between the fifth and the ninth-largest lender in the country.Credit: Dominic Lorrimer
This reflects both the growth in the price of housing and shrinking affordability, which also takes into account the effect of higher interest rates.
Grandparents are also becoming a meaningful contributor to family finances, often called on to pay for education or extracurricular activities like music lessons. The UBS survey says they now account for 14 per cent of these financial “transfers”.
It is hardly surprising that the bank of mum and dad has been estimated to be between the fifth and the ninth-largest lender in the country, with about $35 billion in loans.
Based on the UBS analysis, 40 per cent of the survey respondents either gave or received money in the fourth quarter of last year.
This weaves the bank of mum and dad increasingly into the fabric of Australia’s financial system. Law firm Hillhouse Legal Partners says it is used in two of every five first home buyer house acquisitions.
According to the report’s author, UBS strategist Richard Schellbach, the emergence of the bank of mum and dad is a relatively recent event, one enabled by middle income Baby Boomers having ridden a 30-year residential property and equity boom that has allowed them to retire with an excess of cash.
This is also the first generation to have received the fruits of years of compulsory superannuation.
As such, they are the recipients of a massive wealth wave. (It is this cohort of Australians that has supported consumption activity in Australia over the past few years.)
In decades gone by, Schellbach says, it was only the mega rich who were in a position to help their children buy homes.
However, Baby Boomers’ children, who are mostly in their 20s, 30s and 40s, are navigating a far tougher environment. Even those working in professions are finding it difficult to break into the housing market in major cities. This is hardly surprising given the mean value of a Sydney home is about $1.2 million.
And given people are living longer, waiting for inheritance to kick in means children could be well into their middle age before they see any benefit.
While the pre-death intergenerational wealth transfer via the bank of mum and dad makes sense, it isn’t without societal pitfalls. It creates a divide between those with parents with excess cash to hand their kids and those without.
Thus, two people on the same wage and with equivalent education could have completely different prospects of owning their own house.
Meanwhile, there are also concerns about elder financial abuse arising from the growth in home loans from parents or grandparents.
Legal experts advise that these transfers should be well documented and have clarity around whether the money should be characterised as a loan or a gift.
But neither of these negatives look set to curb the avalanche of money parents and grandparents fork out to their cash-strapped children.
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