5 minute read
Are you the Bank of Mum & Dad?
It has been estimated that 60% of recent home loans had assistance from the Bank of Mum & Dad who are the 9th largest lender in the country.^ Some parents have gone guarantor on the loan and enabled their children to borrow up to 100% of the value of the property and get their foot into the seemingly ever increasing property market.
But what happens if house prices fall? In February, the RBA released data showing that the average Sydney house price fell 14% since the recent peak.^ On a the Dec 21 median house price of $1.55m, that is roughly a$222,000 fall. Asset prices generally only impact owners when they sell.
Median Sydney house prices lost $222,000 in the year ending Dec 2022.
As long as the home loan repayments keep being paid, the family will ride out the price fluctuations.
Whilst many fixed their rates before they rose, when they come off fixed rates, can they afford the increase in the home repayments? Home loan interest rates have risen about 3.5% in the last year which equates to around $300 extra per month per $100,000. If their loan was $700,000, then their variable home loan repayments have increased by $2,100 per month. Do they have the spare cashflow to pay that?
In the last year, a $700,000 variable home loan has had repayments increase by approx $2,100 per month.
If the borrower defaults, the bank could go after the security offered by the guarantor: usually their home. If you are the guarantor, it could be your home.
So what can be done to prevent default?
Kids improve cashflow
They could increase their savings by reducing expenses. They could increase their income by a promotion or work longer hours. The sooner they build up savings the easier it will be. Even if they are still on fixed rates, extra savings will help to spread the load.
Talk to the lender
If their situation is already tight, they could talk to their lender. Banks would prefer to keep the loan so will work with willing borrowers to keep making repayments. If the bank is not helpful, talk to a financial counsellor. They have more power with the banks and can negotiate better terms.
Superannuaton release
If they are struggling to cover their home loan repayments, they could apply to their superannuation fund for an early release based on compassionate grounds to pay the home loan repayement. Find more information on our website or at the ATO.
Move in with the folks
If you have the capacity, they could move in with you or the inlaws and rent out their home. This will free up cashflow however there are taxation and lifestyle factors to be considered. Talk to your accoutant about the impact of Capital Gains Tax and Income tax on the benefits of this strategy.
You fund their shortfall
If the above options don’t solve the problem, you could assist with cash. Below are some considerations with doing this and options if you don’t have the cash lying around.
• Sibling rivalry & the estate: will this impact your estate? Will the siblings be compensated for the early inheritance? Estate planning is important to keep families together. Talk to your lawyer, or us, to update estate plans to reflect the change in circumstances.
• Impact on your retirement: taking money out of your retirement savings, especially now, could have significant long term impacts to your retirement lifestyle. It could take years to recover, if ever.
• Age Pension impact: when you give away more than $10,000 p.a. or above $30,000 over 5 years, the government considers that a ‘deprived’ asset and will include it in your asset and income test for 5 years. Becoming liable for your child’s home loan does not exempt you from this.
• Home Equity Access from Services Australia. If you have equity in your home, you may be eligible to draw down on it via the government’s revamped home equity loan scheme at 3.95% p.a. For more information, go to our website.
As space is limited here, we provide more detailed information on our website.
Learn more about the being the Bank of Mum & Dad:
Suite 2404, Tower 2, 101 Grafton Street
Bondi Junction NSW 2022
(02) 8013 5205 valorprivatewealth.com
General Advice Warning
Valor Private Wealth Pty Limited and Rob Shears are Authorised Representative of Valor Financial Group Pty Ltd (AFSL 405452). Valor Private Wealth makes no representations about the content and suitability of this information for any purpose. It may not be complete or accurate for your purposes. This advertorial contains information and general advice only. It does not take into account your personal circumstances. It’s important to consider your particular circumstances before deciding what’s right for you. Although this advertorial contains information from sources considered reliable, we do not guarantee that it is accurate or complete. We recommend you obtain personal financial advice before making any investment decision.
