As the housing affordability crisis reaches new levels, more home buyers are looking to their already stretched parents, for assistance to get into the market. In this post, Bliss Conveyancing explores the advantages and draw backs of using the Bank of Mum and Dad (“BOMD”).
On of Australia’s Largest Lenders
In 2022, research suggested that the BOMD was the nineth largest lender in the Australian property market, and that cracks were starting to appear as already stretched parents, worsened their own positions to assist their children.
Buying a house is a significant financial milestone for many Australians. However, it can also be a challenging process, especially for first-time homebuyers who may struggle to secure a mortgage loan. As a result, some may turn to their parents for help, seeking to borrow money from them to purchase a home. While there are undoubtedly some advantages to borrowing from parents, there are also several drawbacks to consider.
The Upside
- Low or No Interest Rates: One of the significant benefits of borrowing from parents is the potential for low or no-interest rates. Unlike traditional lenders, such as banks or credit unions, parents may be willing to lend money to their children without charging interest, or at least at a significantly lower rate than what is offered by lenders.
- Flexible Terms: Borrowing from parents may also offer more flexibility in terms of repayment schedules. Parents may be more willing to work out a payment plan that suits their child’s financial situation, whereas a bank or other lending institution is likely to offer a more rigid repayment plan.
- Avoiding Mortgage Insurance: Mortgage insurance is typically required by lenders when borrowers do not have a large enough deposit or have a higher risk profile. By borrowing from parents, homebuyers may be able to avoid this added expense altogether, making the overall cost of homeownership more affordable.
The Cautions
- Emotional Strain: Borrowing money from parents can put an emotional strain on the relationship. Money is a sensitive topic, and mixing family and finances can be complicated. Even if parents are willing to lend money, the borrower may feel a sense of guilt or obligation that could affect their relationship.
- Legal Issues: When borrowing from parents, it is essential to have a formal agreement in place to avoid any legal issues down the line. Without a formal agreement, misunderstandings can arise, leading to disputes and potentially legal action.
- Dependency: Borrowing money from parents can create a sense of dependency that may affect the borrower’s financial independence and decision-making abilities. It may also impact their creditworthiness in the eyes of traditional lenders in the future, as they may perceive the borrower as being too reliant on their parents for financial support.
- Inequality: Borrowing from parents may create inequality among siblings or family members, especially if one child receives financial assistance while others do not. This can lead to feelings of resentment and conflict within the family.
- Limits on Parent’s Financial Capacity: Parents may have their own financial obligations or limitations that could prevent them from lending money to their children. While parents may want to help their children, they may not be in a financial position to do so, which can create disappointment and stress for both parties.
Borrowing money from parents to purchase a house can be a viable option for some homebuyers. However, it is essential to weigh the advantages and disadvantages carefully. While the potential for low or no-interest rates and flexible repayment terms may make borrowing from parents an attractive option, there are also potential drawbacks, including emotional strain, legal issues, dependency, inequality, and limits on a parent’s financial capacity. Ultimately, it is important to have an open and honest conversation with parents before deciding to borrow money, to ensure that both parties are aware of the potential risks and benefits and can make an informed decision.
