Pros and cons of tapping into the “bank of Mum and Dad”

• Some 40% of homeowner hopefuls aged 25 to 34 expect to call on the bank of Mum and Dad
• Zippy Financial Director Louisa Sanghera suggests parents should have full awareness of the implications involved in such agreements
• She offers her take on the pros and cons of tapping into the bank of Mum and Dad

As rental costs continue to rise, an increasing number of young individuals are being motivated to homeownership. This often involves turning to parents or family members for some form of financial assistance.

Recent research released by Australian Housing and Urban Research Institute (AHURI) found circa 40% of homeowner hopefuls aged 25 to 34 expect to call on the bank of Mum and Dad.

Before proceeding with such arrangements, it is crucial that everyone involved fully comprehends the commitment they are undertaking.

Zippy Financial Director and Principal Broker Louisa Sanghera suggests that while the majority of parents may wish to assist their children in realising homeownership, they should do so with full awareness of the implications involved in such an agreement.

“In essence, a parental or family guarantee is when a parent or family member uses
the equity in their home as security against a loan taken out by their child or family member. For example, if a mum or dad has $500,000 equity in their home, this equity can be used as security against their child’s mortgage,” she said.

“Of course, there are pros and cons with using this mortgage facility, which I always recommend everyone understands thoroughly before proceeding with this option.”

Louisa Sanghera, Zippy Financial Director and Principal Broker

Sanghera offers her take on the pros and cons of tapping into the bank of Mum and Dad.

Pros

1. As the borrower is using their parents or family member’s property as collateral, they do not require as substantial of a deposit.
2. Having a guarantee from a parent or family member may enable one to avoid or decrease the expenses associated with Lenders Mortgage Insurance.
3. Assuming the mortgagor consistently makes their mortgage payments, the guarantor incurs no expenses.
4. After the mortgagor has accumulated sufficient equity in their property or has paid down a substantial portion of their mortgage, resulting in an 80% Loan to Value Ratio (LVR), it may be possible to release the guarantor from their obligation.

Cons

1. In the event that the mortgagor defaults on their mortgage, the guarantor (i.e., parents or family member) is responsible for the full amount that they agreed to cover, which includes the portion beyond the 80% Loan to Value Ratio (LVR).
2. While the guarantee is in effect, the guarantor’s capacity to obtain additional loans for themselves or to act as a guarantor for others may be limited.
3. If the mortgagor fails to repay their home loan and the guarantor cannot cover the guaranteed amount, the guarantor’s own property may be at risk.

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