Money lending takes personal turn

The saying ‘there is no such thing as a free lunch’ means that at some time, somewhere in the system, somebody pays.

I’m sure many Australians heard the expression from parents or grandparents, particularly as they made their way into the big wide world in their late teens and early 20s.

For my generation and those gone before it was a wake-up call that you were expected to pay your way once you started working.

A case in point is when I started my first full-time job and was asked to pay one-third of my weekly earnings into the household kitty as board. Instead, I found a tiny flat with utilities included for the same price.

It was located around the corner from one of the most notorious pubs in Bondi and made for an interesting place to live. Nonetheless, I had my longed-for independence.

When buying my first home a few years later, my grandmother, who was the manager of a credit union at the time, lent me the deposit. As she handed over the cheque she also gave me a repayment schedule for the loan plus interest.

Familial lending these days has a name: the bank of mum and dad. According to the financial website Finder, the bank of mum and dad is one of Australia’s top 10 mortgage lenders, collectively worth about $35 billion in Australia last year.

While the great Australian dream of home ownership remains alive, it is becoming increasingly unattainable. Significant issues plague aspiring homeowners, such as increasing property prices, more casualised employment, rising interest rates, and difficulty saving for the required deposit.

“We’ve got to a point where you can’t own a property in this country unless your parents support you; it has a big impact on equity,” Impact Economics and Policy lead economist Angela Jackson said.

“It’s no longer a connection between your own efforts and your rewards in life. That isn’t good for society in terms of equity and future productivity.”

No wonder our young folk are increasingly despondent about the likelihood of owning a home. It has been reported that around 60 per cent of first homebuyers receive some form of financial assistance from the bank of mum and dad.

But it’s not like an ordinary bank.

The bank of mum and dad both lends and gifts money by allowing offspring to access cash before an inheritance. According to a survey conducted by Finder, “Parents give their kids an average of $33,278 to help with a house deposit”.

The Victorian branch of the bank gifts the most at $52,716, while the western branch provides the least at $31,076, likely reflecting the difference in property prices.

The bank of mum and dad provides other forms of home loan assistance, including acting as guarantors (7 per cent of borrowers) and/or giving assistance in repaying it (also 7 per cent).

The bank also offers a generous hardship policy, according to the financial website Mozo.

“Some Aussie parents are providing financial assistance by any means necessary. Almost half (forty-six per cent) of parents had contributed toward purchasing a vehicle for their children, followed by helping with educational costs (thirty-nine per cent), ongoing bills (thirty-three per cent) and picking up the cost of household items, like beds or couches (twenty-seven per cent),” it says.

Who hasn’t helped their kids in some way by matching their savings, buying something that is repaid without interest, letting payments slide, paying a bill, or giving a generous gift?

However, there are potential pitfalls when acting as the bank of mum and dad.

The website of Justice Family Lawyers outlines legal issues, such as: potential disagreements about whether the money was a gift or a loan; unfairness in assistance among siblings leading to inheritance issues; default risk to the guarantors if a loan is unpaid or in arrears; and family law implications in the case of separation and divorce.

At its most extreme, any or all of these can lead to elder abuse, according to research conducted by sociologist Julia Cook from the University of Newcastle.

To minimise the risks of disputes being levelled at the bank of mum and dad, Melbourne’s Umbrella Family Law suggests drawing up a detailed loan agreement that includes interest rates, duration, default provisions and action to be taken in the event of a separation.

Astutely, the firm suggests all parties receive independent legal advice before the agreement is signed. A multigenerational pre-agreement agreement, so to speak.

Wanting to help the next generation into housing is admirable. How to do it without compromising your own financial security is a fine balance for the bank of mum and dad.

• Marion Fulker is an adjunct associate professor at UWA