It’s official, the big 4 banks now have a new player to contend with when it comes to lending with the ‘Bank of Mum and Dad’ now positioned as the fifth biggest lender in Australia.

With rising property prices and stagnate wages hindering young Aussies being in the financial position to step onto the property ladder, it’s parents who are pitching in and lending a hand with the magic 20% deposit required to secure a loan.

A recent report indicated that parents are now lending their children an average loan of $67,000.

So as property prices increase and hurdles for income and deposit requirements tighten, many first home-buyers have no choice but to turn their parents for help. And in many cases unlike bank loans – parental loans are rarely repaid.

So how are parents helping out?

  • They are helping with the deposit by contributing cash.
  • Offering up equity in a property they own as security (which can save thousands in lenders mortgage insurance).
  • Providing financial assistance by making additional repayments to reduce the outstanding loan amount.
  • And in a very small percentage of cases parents are buying a property outright for their children.

Whilst it is admirable to see parents helping their children to secure the home of their dreams – the potential financial impact it could have on the parents making the contribution can not be overlooked.

Let’s face it even the best plans come unstuck, children divorce, parents become ill unexpectedly and in the worse case scenario if the children default on the loan ‘mum and dad’ will either incur a financial cost or in extreme cases, they may even be forced to sell their own home to cover the fallout.

The other major impact on parents is that just as they come to an age where they can afford to channel extra funds into their Superannuation in preparation for retirement or pay down their own consumer debt their financial capacity to do so may be restricted.

For this reason, it is vitally important for parents to seek legal advice before proceeding with any financial pledge to their children. This way they will be fully informed and understand what they are legally committing to and the ramifications should things not go to plan.

It is highly recommended that before either party makes any commitment – the initial step for the first home-buyers should entail sitting down with a mortgage and finance broker to discuss their current situation.

The good new is that our team of professional mortgage and finance brokers have expertise and knowledge across 30+ lenders and they are familiar with the various lenders policies. They also know which ones are open to looking at deposits below 20%, however, with a lower deposit you will need an adequate level of income to service the loan amount you wish to borrow, have a good credit rating and not be carrying excessive credit card or personal loan debt.

If you would like to discuss your current lending options with one of our brokers who specialises in First Home-Buyers, don’t hesitate to call our office today on 1300 888 299. 

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Finance Tips, First Home Buyer, Mortgage News Parents Are Now The 5th Major Lender in The Market