High property prices and tight lending restrictions have seen an increasing number of young people approach the ‘Bank of Mum and Dad’ for their home loan.
This can really help some people to not only borrow their deposit from family members to get started but also get flexible interest-free loans that don’t require extensive hoop-jumping to secure.
The Bank of Mum and Dad can, however, also cause problems. They can damage relationships if loans are refused, failed to pay back or drag on for too long.
It’s important and a good idea to set clear terms right from the start with these sorts of loans to avoid problems later.
The terms to be clear on are the length of the loan, whether or not interest will be charged and if so, at what interest rate.
Because it can be sometimes awkward talking about financial matters with family members it’s important to rise above and push through to formalise the loan from the start to provide a legal framework should things go wrong.
Financial adviser Kyle Frost spoke about some of the risks to The Age.
“You almost need to think of it as a gift, rather than a loan, and accept you’re prepared to sacrifice your wealth for a loved one,” he said.
It’s a sobering assessment but probably one steeped in reality.
For those being asked to be the Bank of Mum and Dad, they can often feel obligated to lend the money so it’s important to thoroughly consider how lending the money will affect financial and emotional/mental wellbeing before coming to the party.
Psychologist Dr Suzy Green from The Positivity Institute also spoke to The Age.
“There was always an excuse and it can cause rifts or endings of friendships,” she said.
“Potentially, you’re not helping them learn how to budget and develop their own sense of competence.”
The Bank of Mum and Dad is clearly a great option for some but can cause huge problems if used in the wrong instance so tread carefully.