(03) 9020 2905Bruce Brammall, The West Australian, 22 July, 2019
There’s a stinking pile of financial bullcrap that I feel I need to disinfect.
It relates to the “monstrous” behemoth now referred to as the “Bank of Mum and Dad” (BOMAD).
Some stuff written about BOMAD recently has sounded authoritative … but stands tall to scrutiny like diarrhea. Most notably, that if the money handed over by parents to their kids to buy homes ranked as lending by an actual bank, BOMAD would be somewhere between the 5th and 9th largest bank in Australia.
This is straight out of “Media Stunts 101”. Give something a catchy title (“Bank of Mum and Dad”). Do a little research (“How much money did your parents give you to help you buy your first home?”). Spin it just so (“Count the whole lot as loans!”). And get some cheap national headlines.
This “research” says BOMAD has “loans” totalling $29.35 billion out to their offspring at the moment. That in late 2017, nearly 65 per cent of first home buyers were at least partly relying on debts to BOMAD to buy their first home. And the average “loan” peaked at more than $88,000.
Apparently, this was putting the home ownership of large chunks of the entire Boomer generation themselves at risk, because if their kids failed in their mortgages, the banks would be selling the parents’ homes to pay the debt.
Complete. Alarmist. Overblown. Bulltish.
In very, very limited situations, some Boomer parents might be putting their own homes at risk. Too complex for me to tackle here today.
Here’s the sad, boring, un-newsworthy, truth.
In most of the “financial transactions” that come to get labelled as part of the $30 billion in loans outstanding to BOMAD, the fact is … they are, actually, gifts.
That is, “Johnny, Mummy and Daddy would like to give you a bit of a leg-up into your first home. Here’s some money to put towards your deposit, darling”.
Simple. So how does a modest gift put the homes of the parents at risk? It doesn’t. Unless those parents add a second layer to the gift and offer their homes as collateral to the kids’ mortgage, or they later regretted the amount gifted to their kids, because they ended up needing it themselves.
The talking up a huge loan book being underwritten by BOMAD is bollocks. First home buyers are surveyed and asked if parents helped out. If yes, how much? Any amount proffered is put down as a “debt” to BOMAD.
But they are, overwhelmingly, gifts.
Banks know this. And they are smarter than that. (As institutions, banks are complete dumb-arses in more ways than you can count. But they’re not THAT stupid.)
If banks see a large wad of money come into your savings accounts just before you buy a home, they ask why.
Question: “What’s the source of that $50,000 that has just landed in your account?”
Answer: “It was from mum and dad.”
Q: “Is it a loan or a gift?”
If you answer gift, they will get mum and dad to sign a document saying it’s a “non-repayable gift”. Most times, parents are happy to sign. Good for you and good for the bank. Parents possibly in the lurch should it all turn pear-shaped. But it’s not a “loan”.
If it’s a loan, the bank will start asking about the loan’s terms with your parents. What’s the interest rate and the repayment timeframe? Loans need to be repaid. Banks get this. It’s a “core competency”.
If you have to repay your parents their $50,000 over five years, that’s $10,000 a year (ignoring interest). Can you afford your home loan repayment, plus $10,000 a year to mum and dad, plus credit cards, car loans, HELP debt, etc?
I don’t need to go out and redo the research, properly, myself. I’m a mortgage broker and I see this stuff. So, trust me, the majority of money from parents to kids to buy homes are “gifts”.
But the “Bank of Mum and Dad” sure is a catchy term. Banks give out loans. So, it allowed for some lazy research and some cheap headlines.
Boomers’ homes are not (generally) at risk if their kids fail on their mortgages.
BOMAD, as far as it exists at all, is largely a charitable institution. They predominantly deal in donations, not mortgages. It definitely doesn’t have $30 billion of outstanding debt on its books.
If it did, my parents have been awfully quiet about the fact that I haven’t made a loan repayment in nearly two decades.
Bruce Brammall is the author of Mortgages Made Easy and is both a financial advisor and mortgage broker. E: bruce@brucebrammallfinancial.com.au.