Bank of Mum and Dad: Millennials’ Path to Homeownership

With a consistent increase in house prices, the Australian dream of homeownership seems increasingly elusive for the younger generation.

In May 2023, the median house price in Sydney alone is around AUD 1.46 million, reflecting a steep 80% increase in a decade.

Similarly, other Australian cities have also witnessed significant hikes in property prices, outpacing the wage growth of millennials who are mostly beginning their careers or are in the early stages of it.

As a result, an increasing number of millennials are turning to the ‘Bank of Mum and Dad’ for financial assistance.

According to a recent report by the Australian Housing and Urban Research Institute (AHURI), approximately 40% of Australian millennials (aged 25-34) are eyeing turning to the ‘Bank of Mum and Dad’ for future home purchases.

As per the latest data, about 60% of first-time home buyers in Australia received financial help from their parents, a sharp increase from 20% in the early 2010s.

This has effectively made the ‘Bank of Mum and Dad’ the ninth largest mortgage lender in Australia, with an estimated value of over AUD 34 billion.

Table of Contents

Bank of Mum and Dad Meaning for Australians

In Australia, the ‘Bank of Mum and Dad’ refers to the financial support parents provide their children, primarily for purchasing homes amidst rising property prices.

As house costs significantly outpace wage growth, more young Australians rely on parental assistance for down payments, mortgage co-signing, or direct loans.

Advantages And Disadvantages Of Using the Bank Of Mum And Dad For First-Time Home Buyers

Using the ‘Bank of Mum and Dad’ as financial assistance can have advantages and disadvantages for first-time home buyers.

Advantages:

  1. Easier Access to Homeownership: For many first-time buyers, getting financial assistance from parents can make homeownership attainable. This assistance can enable them to afford the down payment, qualify for a mortgage, and secure a home sooner than they might otherwise be able to.
  2. Less Interest and Flexible Terms: Loans from family members often come with low or no interest rates and more flexible repayment terms than traditional loans.
  3. Avoidance of Mortgage Insurance: A larger down payment, supported by parents, may help avoid Mortgage insurance, which is typically required by lenders when the down payment is less than 20% of the home price.
  4. Potential for Financial Education: Receiving and managing a loan from parents can be a valuable opportunity for young adults to learn about real estate, loans, interest, and other critical financial concepts.

Disadvantages:

  1. The strain on Family Relationships: Loans between family members can create tension and potentially harm relationships, especially if repayment or disagreement about the loan terms becomes difficult.
  2. Inequity Among Siblings: Providing assistance to one child and not others (or providing unequal service) can breed resentment among siblings.
  3. Risk to Parents’ Financial Stability: Parents who provide substantial financial assistance may put their financial security at risk, particularly if they’re nearing retirement.
  4. Potential Lack of Financial Independence and Responsibility: Relying on parental assistance may delay the development of financial responsibility and independence in young adults.
  5. Inflated Property Prices: On a larger scale, the ‘Bank of Mum and Dad’ can increase property prices as it artificially inflates the buying power of first-time home buyers.
  6. Perpetuating Wealth Inequality: This practice may widen the wealth gap, as not all parents can afford to help their children buy a home.

Bank of Mum and Dad : How it Works

The ‘Bank of Mum and Dad’ work by parents providing financial support to their adult children, primarily to help them enter the housing market.

The specific mechanisms can vary significantly based on individual circumstances and family dynamics, but there are a few common ways this can occur:

Gifts

Some parents give their children money without expecting it to be paid back. This is often considered a gift rather than a loan and is a standard method of helping young adults with a deposit for a house.

Loans

Parents can loan their children money, which they are expected to repay over time. These loans can come with lower or no interest rates than bank loans and may have more flexible repayment terms.

Guarantor Loans

Parents can act as guarantors on a mortgage. This means they agree to cover the mortgage payments if their children cannot do so. In some cases, this might also involve putting up their own home or savings as security against the loan.

Equity Release

P arents who own their home (or a significant portion of it) can take out a loan against the value of their property, which they then lend or gift to their child for a deposit on a house. This is sometimes called an equity release or a reverse mortgage.

Co-purchasing

Parents and children can buy a property together as joint tenants or tenants in common. The parents’ income and assets can help secure a larger loan, and the parents may live in the property, rent out their portion, or leave it empty.

No matter how the ‘Bank of Mum and Dad’ is structured, it’s crucial to have clear agreements in place, preferably written and legally sound, to avoid misunderstandings and potential disputes down the line.

It’s also vital for parents to consider their own future financial needs and security before offering significant financial assistance to their children.