Australian parents are agreeing to become family lenders so they can achieve their downsizing dream and at the same time support their adult children into property ownership.

More parents are having to set up the ‘Bank of Mum and Dad’ because research has shown a dramatic increase from 2002 to 2019 in the percentage of adult children who are living at home. 

In 2002, for instance, just 37 per cent of female children aged 18-29 lived at home with at least one parent. By 2019, this figure had jumped to 54 per cent.

The situation has become a significant problem for Mums and Dads who are keen to sell the family home so they can downsize into their “forever home”, and also want to see their children have a secure and independent future.

According to a 2014 study by the Australian Housing and Urban Research Institute, children leaving home was the third most important downsizing trigger (behind only “lifestyle preference” and “inability to maintain house and garden”).

Enter the ‘bank of Mum and Dad’

Mozo’s 2020 Bank of Mum and Dad report has found that, since 2017, the amount Australian parents have loaned their children for property purchases has increased by 41 per cent. 

Last year, 1.2 million parents loaned their children an average of $73,522.

“Mozo found that the ‘Bank of Mum and Dad’ was the fifth biggest lender in Australia after the big four banks,” said Kirsty Lamont, Mozo Director. 

“Many parents are feeling the pressure to help their children purchase their first property and they draw on a number of sources to help their children.

“Over half of parents of parents used their savings to help their children buy a home, while a further 34 per cent cut back on spending or 16 per cent used their home’s equity.”

Some ideas to help downsizers financially support their children spoke to Donald Swanborough, the training and development manager of Alteris Lifestyle and Care, to better understand the options for parents looking at property-related financial transactions with their children. (Alteris advises consumers on retirement community and aged care financial matters)

According to Mr Swanborough, parents need to be careful that loans to children do not have unwanted financial implications. 

“If parents are entering a stage of their lives where they may soon be eligible for the age pension, the loan will be counted as an asset and may stop them getting a pension, or reduce their pension,” Mr Swanborough said.

“We also know that such a loan could also be assessed if a parent needs to move into aged care, and therefore they may need to pay a higher means tested care fee.”

Mr Swanborough also said that, unless a parent had a “cast-iron” legal contract, it was questionable whether the parent would be able to enforce the money’s repayment. 

This is confirmed by Mozo’s research, which found that almost 20 per cent of parents said they were still waiting for promised repayments from children.

Mr Swanborough said a separate option was to give a non-repayable financial gift to a child, which the child would then use to contribute to the property deposit or overall price.  In this circumstance, the child would also be responsible for organising the home loan.

Gifts of up to $10,000 per financial year, or up $30,000 over a five-year period, are currently not counted towards the pension income and assets tests

Even if the amount is higher than these limits, there is generally a five-year limit on the gift affecting pension payments. This provides an incentive for a parent to organise a gift five years ahead of being eligible for the pension.

Whatever decision is made, Mr Swanborough stressed that the parent needed to get both financial and legal advice, which reflected their unique circumstances and the contemporary regulatory environment, rather than relying on general and/or non-expert advice. 

Home loan options

Fortunately, Mozo has done a lot of the hard work and uncovered some of the best home loan deals around to help your children raise their own finances to buy a property. 

Please note this story has been prepared as a general guide only, and should not be relied upon as a substitute for seeking your own independent legal and financial advice. 

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