Retirement
Parents must be cautious when lending to their kids
Young Australians are increasingly turning to their parents to help them enter the property market, but the so-called ‘Bank of Mum and Dad’ needs to be cautious when lending to children.
Parents must be cautious when lending to their kids
Young Australians are increasingly turning to their parents to help them enter the property market, but the so-called ‘Bank of Mum and Dad’ needs to be cautious when lending to children.
Data from research company Digital Finance Analytics suggests the average amount lent by parents to their kids to help them buy property is more than $88,000 and that cumulatively, the amount lent by parents to their children in Australia is estimated to be at least $16 billion
Melissa Browne, a financial adviser and CEO of wealth and accounting firm A&TA, said parents need to “proceed with caution” if they choose to lend to their children, and suggested those who do wish to help their kids enter the increasingly expensive property market should think carefully about how they do so.
One way parents can help, Ms Browne said, is lending or gifting them the deposit they’ll need to purchase the property, and that some parents “may even opt to co-own” the property with their children.
Parents could also consider unlocking some of the equity in their own home or property to help finance this, but urged those parents to ensure their children understood the risk this would present before doing so.
“It is unhelpful to everyone concerned if you assist your children with a deposit and they subsequently find the mortgage repayments burdensome, so it’s important not to over-extend on borrowing and to make sure from the outset that the loan can be repaid at an interest rate of 8 per cent,” Ms Browne said.
“Then you will be in the strongest possible position to help your kids later, when they may really need your financial assistance”.
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