As property prices enjoy a post-pandemic resurgence, an increasing number of first home buyers are being priced out of the market.
While a boon for homeowners, it’s a different story for those trying to get a foot onto the property ladder.
According to recent analysis, the Bank of Mum and Dad is now ranked as Australia’s ninth largest mortgage lender, lending adult children an average of $89,000 … lending that’s increased approximately 20% over the past 12-months.
How do parents fund the Bank of Mum and Dad and what are the potential consequences?
Funding the bank of Mum and Dad
Traditionally, the Bank of Mum and Dad has relied on one of the following strategies:
- Parents raid their retirement savings or other nest eggs, which can negatively impact their retirement plans.
- Parents act as a mortgage co-borrower, which means they’re liable for any repayments missed by their child.
- Parents act as guarantor on the mortgage, which can constrain their ability to borrow and may put their property at risk if their child defaults on mortgage repayments.
There are other ways too.
The impact on pension entitlements
Before you provide your kids money towards a home, you must clearly document whether it’s a gift or a loan.
If it’s a gift and you receive the Age Pension (or other benefits) you must declare it to Centrelink. The annual limit for gifting is currently $10,000 (or $30,000 over five years depending on your situation) – anything above that may affect the Centrelink entitlements for you and your partner for up to five years.
If it’s a loan, it can still impact your pension entitlements. If you lend your children money, that loan is treated like an investment by Centrelink, with a deemed rate of return – even if your kids weren’t expected to pay you interest or they stop paying the interest you agreed.
When it comes to money and our children, emotions can run high. You need to think very carefully – and take professional advice – to make sure that you are doing the right thing for all of your family.
Being sure your retirement funding is established before helping the next generation is important.
Be cautious, and take advice before you decide.
When it comes to Wills, asset protection & estate planning in Australia, you can trust the oldest law firm in South Australia, Genders & Partners to guide you through the tough decisions you must make for your family’s future care and welfare.
If you have any questions, or would like further information, please call or email us. Would you like a quick phone call to discuss? Feel free to phone or email us or use this link and book a timeslot for a free 15-minute phone consultation on my schedule: https://calendly.com/genders
Can’t get to us? No problem. We now offer home or office visits to many areas in the Adelaide metropolitan area at no additional cost. Call us on (08) 8212 7233 to enquire further.
We can help you to protect yourself and your family. We look forward to being of service.
eBook “The Bank of Mum and Dad”
Check out the eBook containing The Bank of Mum and Dad from senior Australian lawyer Rod Genders.