Can the "bank of mum and dad" affect your retirement?

Written on the 19 May 2021 by Parkside InvestorPlus

According to the Grattan Institute, it takes a decade to save for a 20% deposit for an average home compared to six years back in the early 1990s.

And these savings may still not be enough to secure your first home.

So, it's no wonder 'kidults' are now turning to parents or even grandparents for help.

The bank of mum and dad is now the ninth-largest mortgage lender in the nation with an estimated $34 billion in loans.

These are staggering numbers and while parents/grandparents are helping their children get into their first home, there is a downside that comes along with this noble gesture.

The downsides of the "bank of mum and dad"

First, it has been said that people who have received help from their parents to get into the property market are three times as likely to default on their loan in the first five years.

Help can come in the form of gifting their children money for the deposit or parents become guarantors on their loan.

If parents act as guarantors, they are putting up equity in their own property to be used as additional security for a loan.

Now if the children are unable to make the repayments, not only can legal action be taken against the kids yet also the guarantor.

It's also been said that the bank of mum and dad has contributed to fuelling increased home prices.

As a financial advisor, I like to use the flight to safety analogy put your oxygen mask on first before helping others.

In other words, you need to make sure your finances are squared away and in order before, as parents, you dish out the cash.

Regardless of whether parents give a one-time lump sum or smaller payments on a regular basis, the fact remains that in doing so you are putting at risk your own retirements benefits.

Another study by Legal & General found that 15% of parents had to lower their standard of living because of the financial assistance they offered their children.

And many parents who have helped with a loan are now worried about their own financial security.

In some cases, parents have had to delay their own retirement because of loaning their children money for a home deposit.

Quite often parents who lend/gift money to their children have not had the financial analysis done with respect to the impact on their retirement.

They don't realise the degree to which they could be creating a financial peril for themselves.

As an example, if you take out $20,000 today and assuming return of 6%, that would equate to a loss of $115,000 in 30 years.

The bottom line helping your children to get into their first home is truly a noble gesture, however, we as professional financial advisors thoroughly recommend crunching the numbers to see what, if any, effects this may have on your retirement savings, goals and timeline.

At Parkside InvestorPlus, we can help you align your aspirations and values with a financial plan so you can meet your retirement goals.

Contact us