Parental lending to children has been in sharp decline since the May election last year, but it might be making a comeback.
Economic conditions right now are providing plenty of incentives for young people to enter the property market, with ongoing record-low interest rates, government grants for first-home buyers and soft investor demand, and it could be the ‘Bank of Mum and Dad’ that steps in to help.
According to Digital Finance Analytics, this sort of lending has dropped from around 12,000 loans a month to around just 1,200 since that peak last year.
Chief executive at Aussie Home Loans, James Symond, said there’s some signs that the Bank of Mum and Dad (BOMAD) are getting involved in first-home inquiries.
“If you are in good shape from an employment and income perspective, now could be a good time to get into the market,” he told Australian Financial Review.
Online financial adviser Life Sherpa principal Vince Scully said more adult children were returning home to live with their parents and it was encouraging parents to help them fund a home purchase.
“It is going gangbusters,” he said.
“Two-thirds of first time buyers have some sort of parental support.
“Children arriving back home can create a lot of stress,” he told AFR.
The BOMAD was peaking at the same the property market was peaking as parents with money or equity provided deposits or guaranteed loans to help their children get into the market but since then regulators have tightened the screws on such loaning and tightened standards.
Canstar’s Steve Mickenbecker explained the crackdown when speaking to AFR.
“With recession comes heightened risk awareness on the part of home lenders, who will be placing a tighter ruler over income security in assessing loans,” he said.
“An increasing number of lenders are reserving their lowest rates for higher equity borrowers.”
Lenders are still keen to lend to borrowers with a bigger deposit and that makes it more likely parents and/or grandparents could step in to help fill that need.
BOMADs generally help by either giving a gift, becoming a part owner or acting as a guarantor for their children’s loan, but experts warn that it is advisable to have a formal agreement or things could end up getting messy.