Does helping your kids put them at risk

Pop Quiz: Who is the fifth largest mortgage lender in the country?

The Bank of Mum and Dad.

You might not have seen their ads on the telly. They’re largely working with a word-of-mouth marketing campaign. But they’re gaining traction and market share.

And now, according to the AFR, they’ve got a $16 billion dollar stake in the Australian mortgage market.

“Bank of Mum and Dad… is estimated to have lent about $16 billion…

“It is astonishing,” said Martin North, principal of DFA. “Bank of Mum and Dad has become a critical factor in helping first time buyers break into very expensive property markets – and it is growing fast”…

Large-scale unregulated parental funding is likely to increase prudential regulators’ nervousness about the vulnerability of over-stretched buyers to a sharp correction, or change in personal circumstances.

It also disguises the total amount of debt and expands the danger of a market fall-out from a dip in record high markets to older lenders – many of them either retired or close to retirement.

“This creates inter-generational pressure with older home owners perhaps giving away value that could be part of their retirement nest egg,” Mr North said…

The bulk of the buyers are in Sydney and Melbourne, whose state governments, which are heavily reliant on stamp duty revenues from property sales to balance their budgets, are offering generous incentives to new buyers.

Apparently a third of first home buyers are tapping their parents for help with a deposit.

Martin North is a bit of a worry-wart. And I think it misses the point about why kids are borrowing from their parents. The RBA seems to have missed the point too.

A few weeks back they released a report that said that first home buyers that receive financial assistance from their parents when they purchase a home are twice as likely to encounter financial stress down the track:

“…a rising though still small share of FHBs are receiving financial assistance from family and friends (Figure 11). It is possible that FHBs who have received help to meet the deposit requirement have less financial discipline than FHBs who have saved the entire sum independently…”

I think they have the causality all backwards. They’re saying that kids with poor financial discipline are hitting up their parents, and because of that poor financial discipline are liable to fall into financial stress.

Poor millennials. They cop it from everybody.

But isn’t it more likely that the people who are going to their parents are doing so because they’re looking at buying an expensive place with a huge mortgage.

And show me anywhere in Sydney and Melbourne where you can buy a family home without a huge mortgage.

And so if you don’t have to go to Bank of Mum and Dad, it probably means that financially, you’re probably already pretty sorted.

It should be more surprising that these borrowers run into financial hardship than the BoM&D customers.

So don’t blame the kids. This isn’t their fault. They don’t “lack financial discipline”. It’s just what happens when the property market booms and then booms and then booms some more.

I only wish they’d seen me first.

There are strategies. There are ways to help kids get on that property ladder without raiding your nest egg.

Come ask me. I’ve got a few in my pocket.

Are you helping your kids into property?

Spiro Kladis
Managing Director, Cashflow Capital

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