Should I rely on the Bank of Mum and Dad? / Should I lend money to my kids?

A worrying new report names the so-called ‘Bank of Mum and Dad’ as Australia’s 5th largest lender. This ‘Bank’ – Aussie parents – have collectively lent their sons and daughters more than a whopping $65 billion dollars. Almost a third of parents now help their kids buy a home. The average amount ‘lent’ is $64,000. Why the scare quotes around ‘lent’? Because in two-thirds of cases, Mum and Dad don’t expect to be repaid. (In my book, that’s called a gift, not a loan).

But should you rely on the Bank of Mum and Dad? And, Mums and Dads – should you lend to your kids?

This post – a bumper issue that is the first to tackle two questions – is not only for those considering lending money within families, but also for those who have or will buy a home without family support.

In the early 1990s, baby walkers were popular. By supporting the baby in a chair-like structure with holes for their legs and a wheeled base, many parents thought that the baby walker would help their child learn to walk.

However, research shows that not only do baby walker devices not help babies learn, they actually delay a both motor and mental development. By promoting mobility beyond a baby’s natural ability, and their parent’s reaction time, they can also result in serious accidents. In fact, the risk is so great that Canada banned baby walkers in 2004.

Fast-forward to today, the Bank of Mum and Dad may be promoting borrowing beyond an (adult) child’s usual ability, and their parents’ ability to react also.

In fact, those who borrow money from Mum and Dad are twice as likely to wind up in financial distress. But before we turn to why, let’s take a look at some of the pros of family borrowing and lending.

Pros:

For (grown-up) ‘kids’, the advantages of borrowing from family (or friends, if you’re that lucky!) are pretty obvious.

Cheaper

Firstly, they may give you a better interest rate than a bank would. They may even offer an interest-free loan). While a 4 or 5% rate from a bank might not sound like much, remember that it’s an annual rate. Not a lifetime-of-the-loan rate. Over 30 years, you could easily have to pay several hundred thousand dollars in interest. So any decrease in interest is a huge advantage.

If you took out a commercial bank loan of $400,000 at 4.5% interest, over the course of 30 years, you would pay around $330,000 in interest. Yes, that’s the correct number of zeros. No, I haven’t missed a decimal. Interest rates quoted as an annual figure sound tiny. But over time, they are absolutely colossal.

If the ‘Bank of Mum & Dad’ offered you the same loan at just half a percentage point’s difference (4%), that interest figure goes down to just under $290,000. A saving of approximately $40,000. Not to be sneezed at.

Easier

A further major benefit for the kids is that the ‘Bank of Mum & Dad’ may have more relaxed conditions than a bank. They might not require such a high deposit. (Or any deposit at all). They might not care how long you have been in your job. (Or even if you have a job). They might accept a lower income, or a higher rate of spending, trusting that you will pay them back. (Or not even care if you pay them back at all).

The average Australian first home buyer is now in their 30s. Some predict that within a decade they will likely be in their 40s or even 50s. So it is not a stretch to think that even if parents do expect their kids to pay them back, they may not live to see the final payment, and their kids will instead end up inheriting the remainder as a ‘forgiven’ loan.

What is a forgiven or a forgiveness loan?

One you no longer (or perhaps ever) have to pay back.

Given that a ‘loan’ by definition includes the notion of repayment, it’s really more akin to a gift. (Using  the term ‘loan’ prevents the recipient from losing as much face). In this way, we can view the term ‘forgiven or forgiveness’ loan as a form of euphemism.

(Note that I am referring solely to sums that are ‘lent’ with no expectation of payment. I am not talking about, for example, schemes in the US whereby student loans can be ‘forgiven’ via volunteer, military, or teaching service – which is a form of repayment in my view, and not really a form of ‘forgiveness’.)

Cons:

The disadvantages of borrowing from people you know, however, are much harder to see. They are also much less talked about – and much more numerous.

Endangering parents’ financial status

This one has to go at the top of the list from my point of view.

As the Financial Services Royal Commission recently revealed, one of the biggest examples of elder abuse comes in the form of irresponsible lending, where parents’ homes are mortgaged to secure bank loans for their children. In some cases, parents are even using their superannuation, meant to provide for them in their old age, to help their kids buy a home.

Concerningly, the report revealed instances in which elderly parents were told they would no longer have access to their grandchildren if they did not agree to sign onto a joint loan.

Through joint loans, guaranteed loans, and reverse mortgages, parents’ homes may be used to secure a loan from a bank that the child, on their own, would not have otherwise been eligible for. Parents might sign onto the loan themselves, or act as guarantor, agreeing to make the payments if their child fails to. Or they may even mortgage their own property in order to provide a loan or a down payment for their kids if they haven’t saved their own deposit. All of  these can result in a huge risk if the child defaults on their agreement with the bank, and the parents – who may be retired or about to retire – are unable to make the agreed payments.

So many options {traps}…

There are a number of ways that parents can help out their kids when buying a property too, in conjunction with traditional lenders. While 9% of parents who help their kids out do buy a property for their children, Mozo reports 43% of parents allow their children to live at home rent-free while saving for a deposit. 41% help their kids put together the money for a deposit so they are eligible for a bank loan. 13% act as a guarantor, securing loans that their children would not otherwise qualify for on their own. 9% help them make their mortgage payments.

For parents who can afford to lend all or some of the cost of a house in cash, some may argue that borrowing and lending between parents and kids can even be a financially mutually beneficial arrangement. Returning to the example above, parents who are flush with cash could lend their kids money at 4% interest, which represents a 0.5% saving for the kids, or even at 3.5% interest. That represents a 1% saving for the kids,and gives the parent(s) more interest than they would get from a bank. (The maximum you can typically receive on a bank account in Australia currently is around 3%, and that’s generally only for the first $100,000 invested.)

However, there’s a big opportunity cost. There are much better investments you can get with that sort of cash. And even if you trust your kids completely, it’s not a great idea to use all of your capital to help them out. Without sufficient diversification, if something happens to their income and they are unable to repay you, you are both at risk. Instead of being poised to help them in an emergency, with both of your futures tied to the same asset (your kids’ house) you will both go down with the same ship. And without the kinds of protections like Lenders’ Mortgage Insurance that a bank would take out.

Endangering parent-child relations

Even when tactics as extreme and underhanded as holding grandkids to ransom are not used, the pressure on parents is enormous. And even the most caring daughters and sons may not realise the immense (emotional and financial) pressure approaching their parents (or accepting their offer) may be putting them under.

Most parents don’t want to see their children unable to afford housing. Or unable to send their (grand)children to a good school. Or see them lose their business. So much so, they’re often willing to put their own homes and livelihoods on the line.

Pressure all around…

But it is not only parents who experience pressure in this arrangement. Parents can end up pressuring their kids too. In large part, this may stem from the fact that financially, there is essentially no upside for parents when it comes to acting as the ‘Bank of Mum & Dad’. The main motivators tend to be emotional. The satisfaction of seeing your kids, and possibly your grandkids, settled in a home. But for some parents, that’s not enough.

When you are forking out a lot of money, it’s only natural to want to ensure it is spent wisely. This might mean a preference for a certain type of housing. Or a certain suburb. Parents and kids can clash over numerous questions of lifestyle. Is long term growth or potential future rental income more important? Is proximity to schools or work more vital? Are houses better than apartments? How important is a garden? Think of the stress of planning a wedding magnified by the increased sum of money and timeframe involved.

And because we’re talking about real estate, one of the biggest conflicts can often come down to location, location, location. It’s only natural to want your kids nearby. And if you’re shelling out a lot of money, you might feel more of a right to express this preference.

Look for the strings…

Where children save for and pay off a home on their own, they can invite the level of input and advice from their parents as they see fit. But in instances where parents are putting their own money on the line too, it is not unreasonable to expect that they will also want to have a say in how it is spent. After all, if it truly is a loan rather than a gift, a commercial bank would do the same. Whether you prefer to hear criticisms from a licensed quantity surveyor or your dad – or your mother-in-law – is your choice. But even when it is a gift and not a joint investment, some parents make doing as they say a condition of their ‘gift’. In other words, there are often strings attached.

Endangering relationships with in-laws

It would be very rare indeed for two families to be equally equipped and equally prepared to lend a couple money. Even if this were the case, there are so many other factors to take into consideration, it is spectacularly unlikely. For example, imagine Abby and Bobby have two kids, Yianni and Zara. Both have a partner – Yianni and Yves, and Zara and Zelda.

Yianni and Yves have been looking for a home for some time. They need about $96,000 more than the bank will agree to loan them in order to buy a home in the area they want. Both sets of parents have about $64,000 spare that they could lend the couple. But while Yves is an only child, Yianni has a sister. If Abby and Bobbie give him the whole amount, there won’t be anything left for Zara and Zelda – which would likely sour relations between not only Zara and her parents, but Yianni and his sister.

Say Abby and Bobby give Yianni and Yves $32,000, and $32,000 to Zara and Zelda. The couple receives the remaining $64,000 they require from Yves’ parents.

When it comes to listening to opinions about what – and where – to buy, whose parents do you think Yianni and Yves will feel more obliged to listen to? Whose family will they feel obliged to spend Christmas with – or invite over for a first barbecue?

Endangering relationships with siblings

The above example only begins to scratch the surface of how complicated intra-family lending can be for parents with more than one child. There’s the question of inflation – if Zara and Zelda aren’t ready to buy a house for another few years and prices have skyrocketed, and Abby and Bobbie have been earning interest on the $32,000 in the meantime, should they give Zara and Zelda a bit more money than Yianni and Yves?

What if Zelda’s parents can’t afford to contribute at all, and they end up relying more on Zara’s parents? This could cause a rift between Zara and Zelda. But it could also cause a rift between Zara and her brother. Or even between their parents and Yianni. If Abby and Bobbie give each of their children the same amount of money, but Zelda seems much more grateful, this could cause conflict within the family. On the other hand, if Abby and Bobby persuade Zara and Zelda to buy a house close to them, while Yianni and Yves have been persuaded to buy a home close to Yves’ parents, they may be resentful in the future if they have to take up more of the burden of looking after Zara and Yianni’s parents because Yianni is so distant.

Of course, I’ve assumed here that we have a couple of parents who are still together. And who have decided to split their excess money equally between their children. But reality is often not so neat in that regard either.

Matters are complicated even further in cases of divorce, death, remarriage and step and half siblings. What happens where you and your sibling(s) have different parents of different means? Or if, instead of dividing your loyalties between your parents and your in-laws, you have to take into consideration the financial means and opinions of your divorced parents, and their new partners, and their kids, and then the same of your partner?

Even in the most traditional, nuclear family, massive differences can occur. What happens when one child needs more help than another? This could be through no fault of their own, such as a disability or an injury or a mental illness or an addiction or an abusive relationship… Or perhaps they have made some bad choices. A risky investment that didn’t work out. Too many expensive purchases, no savings, etc.

Particularly in the case that their situation is a result of bad choices, if the parents give this child more assistance than the others, it would be unsurprising if their siblings were jealous.

What happens when one kid earns more money than the others? When one has richer in-laws? Or one has more expensive tastes? When one kid has eight kids of their own to look after, and another has none?

Risks for yourself

In addition to the loss of freedom you may feel through your parents influence over your purchase, consider also whether you will experience a loss of ego. Parents, too, should consider whether by helping their kids they are perhaps inadvertently robbing them of a vital sense of accomplishment. After all, buying and paying off a house is a major financial achievement and an important milestone.

And it’s not just at the time of lending that things are tricky.

In fact, there are even more complications that can occur along the way.

Parents, what happens when one of your kids doesn’t make their loan payments on time – or at all?
Kids, how would you feel if your sister or brother stopped paying their loan, while you continued to? If your parents, who have a better relationship with you, expect you to keep paying, but don’t approach your sibling because they’re afraid they’ll never see them (or their grandkids) again?

What happens when interest rates change? Whose responsibility is it to keep on top of that and ensure a fair rate is paid?

Or what if your parents divorce, and have to split up their assets? Including the house they’ve mortgaged to help you out? What if you and your partner divorce? And it’s your partner’s parents who helped finance the purchase of your house?

Intergenerational unease

Disputes can last through generations. Even beyond the grave. What happens when the parents eventually die, and it’s time for their estate to be divided up? In the absence of a written contract plus meticulous records kept by all parties, it will be very difficult for the child who has paid back all or most of their loan to get a fair share of the estate that takes into account the amount the other child has already received. And chances are, whoever isn’t paying isn’t keeping records either.

Kids, what happens when you want to go on a holiday, or buy a new car, or start a family? So long as you are making the minimum payments, a commercial bank would not care whether you spend the rest of your money on McDonalds every night, or caviar baths, or jet skis. But your parents might not look too fondly on irresponsible spending if they are going without to have given you a helping hand. Even if they don’t complain, you may feel restricted in your spending.

None of these are made up scenarios (except for the caviar and jet skis!), but stories I have heard or personally witnessed all too frequently.

Far-reaching, long-lasting…

Because talking about money is taboo, often, it’s only commercials and the media that we hear from. And these sources are all too desperate for us to view relying on the bank of Mum and Dad as ‘normal’ and problem-free. We don’t hear the kinds of stories I’ve just told.

I could go on and on. In short, the dangers of damaging relationships across and over the generations of a family are both far-reaching and long-lasting.

But it’s not just finances and relationships within the family that are in danger.

There’s societal damages, too.

Australians (and many others) now live in a country where instead of home buyers being expected to demonstrate a substantial (>20%) deposit of genuine savings, responsible patterns of spending, and a solid income, it is increasingly acceptable for banks to advertise loans that require a third party signatory (parents as guarantors or joint applicants).

Playing into the bank’s pocket…

All of the ‘big 4’ banks in Australia advertise their parental or family guarantee home loan options. Westpac even has it on their home loan front page. All of this information is tailored to make prospective home owners feel positive about asking for help – and their chances of getting it.

Here’s what NAB has to say:

‘Asking family for help isn’t a cop out. Far from it. Getting a loved one to help you out is a common way of buying your first home.

You can ask your family for a gift. Make sure you are all clear on the arrangements for the gift and you explain these to your lender. You’d be surprised at how many parents jump at the opportunity to help their kids buy a home.’

Of course, they do mention some pitfalls right at the bottom of the page. The first of which is

‘If you have a family guarantee and you end up being unable to make your loan repayments when they are due, then the bank may look to your guarantor (your family member) to pay the guaranteed portion of your loan. It will be really important for your guarantor to get independent financial and legal advice before they enter into their guarantee so that they understand all their obligations and the pitfalls.’ (emphasis added)

What absolute garbage. The bank WILL look to your guarantor. They will not simply shrug their shoulders and say ‘oh well, we didn’t really want that money anyway. It’s okay, you don’t have to pay us back. Go on your merry way!’

Westpac lists a variety of ‘benefits’ for the borrower and the guarantor (although they don’t spell out any disadvantages). It is noteworthy that, as above, all of the benefits for the borrower are financial in nature, and none of the benefits for the guarantor are. The only supposed benefits for the guarantor are the ease with which a Westpac loan will allow them to fork over their hard-earned money.

The Big 4 + Mum & Dad = Trouble

Given the enormous presence of the ‘Bank of Mum & Dad’ as Australia’s 5th largest home loan provider, it’s no wonder the Big 4 are looking to get a slice of this action. For those parents (i.e. the majority) who can’t afford to lend their kids the whole sale price of a house, some arrangement of this type is pretty standard. But just because something is ‘common’, as NAB points out, does not automatically mean it is good. Dying of diarrhea is a pretty common way to die during childhood, but it is certainly far from a good outcome. Sexual assault is far from uncommon, but likewise, is not good. And economic inequality is certainly widespread, but only a tiny minority (those at the top) would say it is a good thing.

Besides, despite the increasing numbers of parents giving their kids a helping hand, and what the banks would have you believe, parents helping their kids out financially with a house is NOT the norm. The vast majority of so-called ‘kids’ buy a home independently. So if you are in this basket, you are not alone.

Buying a house on your own is not as hard as you think
(So long as you have reasonable expectations)

As I’ve pointed out before, although mortgages are larger and salaries haven’t risen in step with increased house prices, houses today are much larger than they used to be. And a large part of the reason that mortgages are bigger is because people are saving less.

Why is family assistance being pushed then?

My belief is that increased acceptance of family support in purchasing a first home is a bandaid method. It’s helping to cover, rather than to heal, the housing affordability problem in parts of Australia. In fact, it may even be helping it to fester.

In an environment where parents are now the 5th biggest lender, and the four big banks push reliance on one’s parents as the norm, there is very little urgency or support for examining the issues young people face when it comes to housing affordability.

Fingers are often pointed at ‘mum and dad’ property investors for driving up demand and prices. But I’ve never heard of anyone examining the effects of parents helping pay for their kids’ houses. And that would seem to be a more relevant factor. After all, the first home buyer market and the investor market, despite some overlap, are not exactly the same.

Parent’s aren’t banks

Financial service providers, politicians, and perhaps especially adult ‘kids’ need to remember that parents are not banks. Not all parents have the financial ability to help their kids get a foot on he property ladder, even if they desire to.

On average, one in five first home buyers now rely on loans from family. It’s almost a quarter in areas like Melbourne and Sydney. But the majority of parents don’t have almost $70,000 lying around to help out each of their adult children. And even those who do have the right to use this money as they see fit. If that means helping an adult child, then that’s their prerogative. But ‘kids’ shouldn’t expect this help.

Nor should politicians. Prime Minister Turnbull, for example, has commented that wealthy parents should “shell out” and help their kids into homes. But little has occurred to address housing affordability for those not lucky enough to benefit from the ‘glass floor’. We need a government who will address intergenerational inequalities and housing affordability for all. Not just a privileged few.

Worryingly, I suspect that banks prefer things this way. They get kids to take out enormous loans with massive payments, netting themselves much higher profits than in the past, but at the same time, there is very low risk because the parents’ house is used as collateral. Banks have a vested interest in pushing the narrative that housing is unaffordable.

Great expectations

In some cultures, it is usual for parents to help their kids out with university education, homes, cars, childcare, and many other things, with the expectation that they will be looked after in their old age. Generally, this stems from a traditional lack of social services, pensions, and superannuation plans.

I am personally convinced that looking after one another is a wonderful thing. However, these social safety nets area much better way to ensure everyone get looked after. If we each look after our own needs in old age, plus contribute to tax for those who cannot provide for themselves, everyone can have a decent standard of living. When our futures are our own responsibilities, we can decide to strive for high-paying jobs, or to be content with a lower salary and greater satisfaction, on our own, without having to feel pressured or guilty.

But if people have to rely on their children, what happens to those who, through choice or circumstance, have no kids? Or those whose kids move away? Or marry people who have very different expectations?

What happens to those who give their kids all they can, but their children aren’t grateful?

What about those who outlive their children? I can imagine nothing more devastating than losing a child, but I’m certain that the pain of this loss would not at all be eased by becoming destitute at the same time because you relied on your child’s ability to work for you to be able to eat.

The freedom of being able to dictate your own path

And of course there is the problem of parents wanting to control every aspect of their child’s life to ensure that they will be able to keep them in a lifestyle they’re accustomed to. A couple of lawyers, for example, are even more likely to want their child to follow them into the legal profession, instead of becoming, say, a mime, if they will need their child’s income to sustain them in their old age.

In this model, no one has any freedom. You start off being financially supported by your parents,  studying what they want you to in order to get a good job to be able to support them. Then when you have kids, ad do the same for them and expect the same of them.

When I was teaching, I came across many students who were terribly unhappy and unmotivated. They were all studying something they had no interest in, to take up jobs they didn’t want to do, all because of parental expectations.

Even in the absence of cultural traditions, it is not unreasonable to think that some parents who are forking over tens, or even hundreds of thousands of dollars today might have some unspoken expectations for the future. A spare room, for example. Care in their old age. A repayment in kind.

Setting up for failure…

Finally, you may think I’m saying all this to make those who don’t have parents who are willing and able to help them out, or who want to stand on their own two feet, feel better. But this warning is also for the kids (and parents) who do.

Because lending your kids money doesn’t turn out well for them in an economic sense in many cases either.

Alarmingly, those who get a loan from Mum and Dad are twice as likely to encounter financial stress later, and even go on to beg help from friends to pay their bills. Parents who think they’re doing the right thing by helping their kids out with money may in fact be harming them by enabling irresponsible spending or setting their children up in a lifestyle (a ritzy area with its attendant expectations of interior design and furniture, a bigger house to heat and cool and light and maintain, a school their grandkids would otherwise not be zoned to etc.) they can ill afford.

The Reserve Bank’s research department found that almost a third of kids who got financial help from the Bank of Mum and Dad to pay their deposit wound up in financial difficulties.

The RBA’s research also reveals some interesting patterns in terms of how people handle financial difficulties, highlighting the resilience that those who did not have help posses in comparison to those who relied on the Bank of Mum and Dad.

When in financial difficulty, those who didn’t have help from their parents to put together a deposit:

  • Were more likely to pawn something they owned to get the necessary cash
  • Were more likely to go without a meal

In other words, they were more likely than those who relied on the Bank of Mum and Dad to sacrifice to make their commitments.

On the other hand, those who had help from the Bank of Mum and Dad, when in financial difficulty:

  • Were more likely to fall behind on their utilities
  • Were more likely to make a late mortgage payment

In other words, they were more likely than those who stood on their own to neglect their commitments.

The most common behaviour for both groups, however, was to ask for help from family – although those who had already received help from their Mum and Dad were the most likely to ask for help a second time.

Mums and Dads, statistically speaking, if you lend money to your kids to help them to get a deposit, you can expect an almost 1 in 3 chance that they will fall into financial stress, and a nearly 1 in 4 chance that they will need help a second time.

Why is this unsurprising?

There’s a reason banks ask a lot of questions and have a lot of rules about who to lend to.

If you think it’s just because they want a reliable borrower who will pay back the loan on time, you’re mistaken.

Those rules are actually there to protect borrowers. To ensure that they don’t borrow more than they can afford, and lose everything.

As the sub-prime mortgage crisis in the US demonstrates, lending to people who can’t afford what they borrow is often more profitable for banks. (At least until the whole thing collapses like a house of cards). This is because banks take out insurance that protects their interests, not yours. And they get to charge you late fees, and extra interest if you are late with payments.

From a bank’s (and certainly a broker’s) standpoint, a customer who pays their mortgage off quickly is probably the worst kind of customer.

The importance of communication

Parents should ask at least as many questions as a bank. However, I suspect that this is very difficult, and probably often glossed over.

Talking about money – the major theme of this blog – is very difficult for almost everyone. But it is particularly so in intimate relationships, and between family members, especially in-laws.

It’s never ‘just’ about money. It’s bound up in all sorts of expectations and beliefs.
In order to assess your ability to pay back a loan, a bank will ask you a series of questions. How much do you earn? When did you begin your current job? How many children do you have? Do you spend much each month eating out?

The bank is interested solely in your ability to repay the loan. You don’t need to fear judgement when you mention that you have no children, or that you eat out five times a week.

But imagine that conversation with your parents or in-laws.

Suddenly, all of those questions have other, often uncomfortable, nuances.

‘How much do you earn?’ can be an awful question to answer. What if you earn more than your parents? What if you earn less than they would have hoped for you?

Men, what if your wife’s traditional family are unimpressed with your ability to ‘support’ her?
Women, what if you earn more than your husband? Most women who do tend to keep this a secret.

Likewise, your parents or in-laws may want to know if you plan on having kids any time soon. And unlike the bank’s purely pragmatic interest, they may be wanting you to give them grandchildren. Or to dictate what they view as a suitable time frame.

Even how often you eat out can lead to all sorts of fear of judgement, surrounding who does the cooking in a household, whether they do a good enough job, whether you’ve put on weight recently, and so on.

On the other hand, many parents may feel uncomfortable asking their child and son or daughter-in-law if applicable about these topics. This can lead to making a loan agreement blindly, without fully understanding the state of their child’s financial situation.

Legalese

Even if you somehow manage to talk everything out amicably and write up a seemingly watertight contract, the whole area of ‘gifts’ and ‘loans’ is not just linguistically fuzzy, as I pointed out above, but ill-defined legally too. According to one family lawyer, Lauren Pattford-Smith, in the absence of any clear laws on the matter, courts are coming to their own conclusions about whether a sum is a ‘gift’ or a ‘loan’.

In sum, if you (or your kids) can’t meet the requirements that the bank has imposed (and often, they are conditions the bank is obliged by the government to impose), then I suggest you think really seriously about whether you (or your child) are ready to buy a house, or whether the property you have chosen is really suitable for your means.

Even parents who are able to avoid these biases and who aim to give their kids advice with their children’s interests at heart may not always get it right.

Parent’s aren’t financial advisors either

Mums and Dads, don’t underestimate how much your kids are putting their trust in you. Not only are kids relying more on the Bank of Mum and Dad, they’re using Mum and Dad instead of an advisor or doing their own research too. But as a Domain report reveals, while parents may often be kids’ first and most trusted source of property advice, they’re not always the best. Quite aside from personal biases, a lack of professional training and broad experience make it difficult for most parents to provide the kind of advice their kids need. Parents often have in-depth knowledge about the area they themselves live in – an unbiased reason for recommending it – and have perhaps experienced rising prices, something they hope their kids will experience if they buy there too. But the suburbs which were affordable in their day are frequently unaffordable now. Such a local focus may result in overlooking up-and-coming suburbs with more potential for future growth, and greater affordability now.

Naturally, financial advisors and buyer’s advocates and real estate agents and mortgage brokers and bankers all have their own biases too. That’s why getting information from a variety of sources is vital. (And why you should check out my post on getting good advice, and on avoiding bad advice). Parents, give advice when it is asked for, but encourage your kids to do their own research too.

Parents can give great advice

Not is any of this to say that parents don’t have good advice to give. As I pointed out in another post, some advice is timeless. Mums and Dads, unless you are involved in the financial sphere or the real estate sphere, it is this timeless advice that I think you can most valuably provide.

As a homeowner myself, I can tell you about the suburb I have purchased in, in a general sense, with some amount of confidence. If you give me a little time, I could do some research and tell you the current vacancy rates and discount rates and so on. But I’d be hard pressed to tell you off the top of my head what the cheapest suburb in Australia is at the moment. I only knew that kind of stuff off hand when I was actively researching rental properties.

Likewise, I can tell you about the bank I had a mortgage with, and what they were like in terms of customer service, and how their interest rates stacked up back when we were still paying it off. And I have pretty warm and fuzzy feelings toward that bank (only in part because they sent us a box of chocolates!). But I couldn’t tell you whether their interest rates are competitive today or not, nor what other banks have to offer

What I can tell you, and what most people who have purchased a house could too, is how to deal with real estate agents. How to inspect an apartment. What kinds of problems that come up in a building report are structural and expensive, and which are cosmetic and fixable. This kind of advice is timeless and not reliant upon up-to-date specialist knowledge.

Of course, just as some parents have more money than others, some have more knowledge of real estate than others too.

Kids, just as you can’t assume that your parents will be able to act as your bank, you shouldn’t assume that they can act as your advisors either. Once again, getting advice from various sources and weighing up different opinions is vital.

Final word

None of this means that family members shouldn’t support one another financially. Living together and contributing  to household tasks, enjoying one anothers’ company, and living more economically in a group is one example of a potentially mutually beneficial arrangement.

But when it comes to borrowing/lending you should make sure of the following pointers:

  • Communicate honestly with each other
  • Make all expectations clear in writing
  • Ensure everyone in the family knows what is going on and is happy
  • Double check that the parents can truly afford this and the arrangement will not endanger thier future
  • Make sure that the kids are truly ready for a loan and the arrangement will not simly put them at greater risk. In other words, giving someone a loan because a bank wouldn’t lend to them is not always the best way to help them.
  • Stick to your agreement

Remember that assistance comes in many forms. It is not necessary to give money. Sometimes the best help you can give might be advice or a book.

If you need advice, check out these posts: Avoiding bad advice / Finding good advice

If you can’t afford the house you want, think about your dream house here.

And if you need help getting started and  inspecting a property, try this advice.

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2 thoughts on “Should I rely on the Bank of Mum and Dad? / Should I lend money to my kids?

  1. hi Sarah; great story on mum and dad bank, eyes now sore from the size of reading it but has some great advise in the message.
    by for now stay safe pete the plumber.

    1. Thanks Pete! I’m glad you liked it. Yes, I’m afraid this post was a bit long… perhaps I should have split it into two – one for the Mums & Dads, and one for the kids. But I wanted to get both sides to read about what problems can occur for the other. I think it’s good if parents understand how lending may not only negatively impact their own finances, but the financial future of their kids. And if kids understand how borrowing may not only negatively impact their own financial future, but endanger their parents’ income.
      Thanks for leaving a comment – all the best!

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