Whether you’re on the giving or receiving end of one of Australia’s biggest financial institutions—The Bank of Mum and Dad—chances are the relationship’s been put under a bit of strain this year.
Alas, if you’ve never transacted with the increasingly tapped fund, news of its duress might even inspire a wry smile.
With six consecutive rate rises in the last six months and a cost-of-living crisis stocking our supermarket shelves, many first-home-buying-borrowers are struggling with repayments after borrowing maximum amounts when interest rates were at record lows. Ah, the good old days of 2020.
Now the pendulum has swung in the other direction (AKA record highs) and the old quip ‘don’t mix family and business’ is ringing true for many—particularly borrowers who took out one or two year-fixed rates that are now coming to an end.
A snapshot of the current scene looks something like this: Sydney’s average property price has dropped about 9% from December highs, while the number of first home buyers has almost halved since the beginning of 2021. Those who’re refinancing have increased by about 23%, with that number only expected to grow as fixed-rate loans worth more than $450 billion are due for renewal across Australia over the next 18 months.
According to AFR, over 50% of Bank of Mum & Dad (BOMD) borrowers are spending a high percentage of their income and therefore under financial stress, as opposed to 28% of property buyers who relied on themselves to acquire a home. Still, an estimated two-thirds of property buyers say that they are concerned about meeting their mortgage repayments and are spending less on food, entertainment, and retail to make ends meet.
Not only are children who borrowed from their folks feeling the stress, but parents who lent deposits, gave cash, used equity in their own home or underwrote are also feeling the heat—especially if they have more than one child. If only they could really pick favourites.
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Not only has Mum & Dad’s asset base and cash flow been reduced, there’s likely little recourse or asset protection on their generous gift. Many parents are now facing financial stress because of their children’s situation.
While most parents who are in a position to do so are more than happy (okay, that might be a stretch but it’s at least what they tell everyone on Facebook) to help their kids get a foot on the property ladder, their generosity is not without risk. At the first sign of interest rate hikes, experts warned the BOMD to be careful and sensible with their promises, but not everyone heeded the warnings and now they could be paying the price, literally.
