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New Trend In First Home Buyer Support Has Experts Concerned
The Australian property market is becoming increasingly challenging for first home buyers. Interest rate hikes and soaring housing costs mean more young Australians are putting pressure on parents and grandparents for early access to inheritances.
The 'bank of Mum and Dad', or BOMAD, as it is more popularly known, has gained momentum as first home buyers struggle to secure loans from traditional lenders.
However, legal experts are concerned that undue pressure could cross into financial elder abuse territory.
Pressure on family members
In the face of rising interest rates and escalating property prices, first home buyers are increasingly relying on their parents and extended family members for financial support. This pressure comes on the heels of the Reserve Bank of Australia's (RBA) 12th interest rate hike since May last year.
While the Productivity Commission's 2021 report estimates that Boomers will pass down approximately $224 billion in inheritance annually by 2050, current economic conditions have led to more open discussions about gifting assets while 'gifters' are still alive.
When does pressure for financial assistance become elder abuse?
Many parents are willingly gift early inheritances, but legal experts caution that undue pressure from children can lead to financial elder abuse.
A concerning 42% of older Australians admit to experiencing such abuse.
“We have seen circumstances where children apply undue pressure on their parents to lend money or downsize out of the family home just to help them purchase their first property,” Suzanne Jones, partner and head of estate planning at Coote Family Lawyers, told SMH.
Navigating financial gifts and loans
Financial gifts from parents to adult children often range between $200,000 and $300,000 and are often intended to help first-home buyers avoid Lenders Mortgage Insurance.
However, parents may worry about the potential division of the gift in the event of a relationship breakdown. In such cases, legal experts suggest establishing binding financial agreements or loan agreements with a 10- to 15-year payback period and interest on some of the capital. Seeking legal advice before transferring funds can also help protect both parties involved.
Protecting interests through legal agreements
To avoid complications in the event of a relationship breakdown, family lawyer Stefani Janson recommends seeking legal advice and drafting financial agreements before providing financial assistance.
Lawyers consider the intention of the gift, its purpose, and whether it was intended as a repayable loan. Evaluating these factors helps determine the conditions and expectations surrounding the financial assistance.
Implications for younger Australians
Without the support of their parents, many young Australians will struggle to enter the property market due to skyrocketing prices and stringent loan qualification criteria.
Many young buyers are already having trouble saving a sufficient deposit to qualify for a home loan. However, older Australians intending on helping their children in these instances are cautioned to safeguard their own financial security, as contributing to their property purchases could impact their retirement funds and future financial stability.
The Bottom Line
Increasing pressure on family members to provide early inheritances for first home buyers reflects the challenging landscape of the Australian property market.
Financial assistance from parents can be a lifeline for young Australians, but legal precautions must be taken to protect the interests of all parties involved.
Seek legal advice and establish clear financial agreements to mitigate potential risks.
As the property market continues to evolve, it is crucial for families to navigate these decisions carefully while prioritising long-term financial security.
Financial disclaimer
The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.
