Tapping into the bank of mum and dad: risks and safeguards

By Michael Mata
With house prices continuing to climb, many young adults are increasingly turning to the “bank of mum and dad” to afford their first homes. In fact, according to recent research by ANZ Banking Group, the number of parents guaranteeing their children’s home loans has soared fourfold (from 5% to 20%) in the past five years, despite the very real potential for family feuds should things go awry.

Lenders can often foreclose on guarantors’ homes if borrowers default, exposing parents who’ve worked hard and saved all their adult lives to the threat of homelessness and financial loss.

Savvy banks and credit unions, aware that parents often balk at the risks, are developing products limiting the guarantors’ risks by splitting the loan amount over two loans. Christopher Foster-Ramsay, principal of Foster Ramsay Finance, calls asking family members for help the “trend of the future.”

To avoid the risks altogether, lawyers, consumer advocates, and regulators recommend that parents and relatives consider alternative strategies, such as gifts and loans. "Seek a clear description of how the money owed will be calculated if the worst happens and the borrower does not pay. If not comfortable with the amount, ask for a reduction," said Richard Foster, an industry fellow in banking and finance at Monash University.

Will Ranken, head of home loans product management at ANZ, said default rates for mortgages with guarantees are lower than for those without guarantees, although he declined to disclose the rate. He said lenders understand the fears about potential risks and are attempting to allay concerns by limiting the risk to guarantors, expediting payments, and tightening eligibility.

Matthew Bransgrove, senior partner with Bransgroves Lawyers, suggested loaning the money and then protecting the loan with a mortgage on the new property, especially if the child is married.  

A relationship breakdown between a child and a spouse can lead to a downward spiral that culminates in delinquent debts and repossession. "Mum and Dad are naturally concerned about the possibility that if a relationship fails the equity in the property, including that represented by the parents' contribution, will go partly or wholly to their child's former partner," said Bransgrove.

"The parents' contribution to the couple and loan can be protected by a mortgage. If the property has to be sold and the proceeds split, the parents will get their contribution back before the child's former partner gets anything."

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