The Bank of Mum & Dad
With prices of houses these days, it’s no wonder that inter-family gifts and loans as known as the Bank of Mum & Dad, are at unprecedented levels – but they come with both advantages and disadvantages and here, knowledge is key.
In 1986, the average house price in Australia was $76,278 (4.4 times the average income of $17,321 pa). 30 years later, in 2016, the average house price was $547,714 (6.9 times the average income of $78,832). With house prices rising out of sync with income growth, many young Australians looking to buy their first home have had to look outside the traditional course of actions when it comes to their finances.
Recent Mozo research has found that the ‘Bank of Mum and Dad’ is now the fifth biggest lender in Australia (behind CBA, Westpac, ANZ and NAB), as young home-buyers turn to parents for help getting into the property market.
Together with our partners, Oak Financial Group we discussed the considerations, for both parties, when borrowing from the Bank of Mum & Dad.
But first, a snapshot of the Bank of Mum & Dad
The Mozo research also found:
- The Bank of Mum & Dad has lent $65.3 billion to young Aussie home buyers
- 29% of parents assist their children in buying a home
- Parents are lending more than $64,000 per family on average
- 43% of parents help by letting kids live at home rent free
- 41% of parents directly contribute to the house deposit
Parents are finding the money to help their children out in a number of different ways, including dipping into their own savings (2/3) or by delaying retirement and selling off assets.
Unlike other lenders in the home loan market, the majority of parents who give their hard-earned to get their children into a home don’t expect to be paid back. What’s more, even those who are expecting to be paid back don’t expect any interest to be paid on top.
- Not expecting the money to be repaid – 67%
- Yes, expecting the money to be repaid with interest – 0.6%
- Yes, expecting the money to be repaid without interest – 18.7%
- Yes, expecting the money to be repaid in part with interest – 10%
- Yes, expecting the money to be repaid in part without interest – 0.6%
So, what’s Oak Business Partners’ thoughts on what to consider when borrowing from the Bank of Mum & Dad or being the Bank of Mum & Dad:
- Generally gifts are not considered taxable to either the giver or the receiver, however if mum and dad have the money tied up in investments then withdrawing that money in a tax effective manner will need to be a primary consideration. Capital gains tax may apply because generally a withdrawal from investment assets (unless it’s cash) will involve a ‘sale’ effectively.
- Gifts may bring mum and dad down under the assets test for a healthcare card or pension benefits although the limit on that is only $10,000.
- If interest is involved there may be tax consequences for mum and dad who will need to declare it and it will generally not be deductible for the kids paying it unless the loan was used to acquire assets for investment purposes.
- Legal advice should be sought if the money is being advanced to kids in a de-facto relationship, if that relationship fails mum and dad may lose half their money.
- If mum and dad are getting the money from their super funds, getting it back in may be an issue dependant on their age. You may need your financial planner involved in this process.
- If the money is coming from a business that is operated by mum and dad, depending on the structure of the business eg A Company, the withdrawal may trigger Division 7A issues (triggering interest and mandatory dividends) if coming out as a loan or tax consequences at a personal level if paid out via a dividend, wages or directors fees.
- Other issues to consider when withdrawing funds from a business are the obvious cash-flow implications and what it will mean for the business’ solvency going forward.
- As always, being proactive and advising your accountant / financial planner is recommended before any action is taken so that planning and restructuring can minimise any flow on effects. Coming in after the year has ended will not yield favourable results.
Some other considerations
Many lenders do require any ‘loaned’ money from the bank of mum and dad to be signed over as a non-refundable gift and held in your bank account for three months prior to the loan application process taking place. And, the borrower/s will still need to prove a savings history and have at least 5% of the deposit coming from their own, provable bank statements as savings. This could prove problematic should mum and dad want the money repaid at a later date (with or without interest).
Around 60 percent of Australians would not consider asking their parents to go guarantor on their home loan, according to Mortgage Choice’s 2016 First Home Buyer survey leaving it often a behind closed doors arrangement. Should relationships sour (between the borrowers, the parents or between parents and child) things can get complicated quickly.
The Oak Financial Group recommend a couple of things if you are looking at borrowing from the Bank of Mum & Dad (or being the bank):
- Have a chat with your financial planner and/or accountant/Super administrator like Oak Business Partners, to determine the most financially sound decision
- Come and have a chat with the Oak Financial team about your options and the possible lending requirements if the Bank of Mum and Dad is involved
- Chat with your solicitor about ensuring all parties are legally protected
Contact the Oak team today to learn more.
*Mozo Research Sept. 2017