Rising house prices and stagnant salaries are causing more Australians to rely on their parents for help when financing their first homes.
A recent study by Digital Finance Analytics found that the 'Bank of Mum and Dad' now finances over $20 billion worth of home loans and deposits nationwide – enough to put this group among the top 10 mortgage lenders in Australia.
Around 55 percent of first time buyers now receive some form of financial aid from their parents. This may be funding towards their deposit or ongoing mortgage contributions. The average cash injection is around $88,000.
Why is this increasing?
House prices and minimum deposits have risen considerably over the past decade, especially in Sydney and Melbourne, while income growth has largely failed to keep pace. While this has made property increasingly expensive for new home buyers, those who already own a house have been enjoying equity growth, and many are tapping this resource to give the next generation a helping hand.
Parents who have already benefited from house price growth may be eager for their kids to step onto the property ladder themselves, sooner rather than later. However, those parents putting up the cash with the expectation of repayment down the line may be disappointed if the housing bubble bursts and price growth slows down.
Should parents finance their kids' homes?
Not all families are in the position of being able to finance their children's homes, especially those who weren't able to buy their own homes in the first place and may be finding it increasingly challenging to do so. Even those that can help the kids out should be aware of the considerable risk involved – not only to themselves, but also to their children.
Changes in personal circumstances, falling house prices and rising interest rates could all put a strain on finances across the generations, especially for parents who are still paying off their own mortgages or other commitments. Parents who act as guarantors for their children and pledge their property as security could also risk losing it.
What are the alternatives?
First time buyers who want to avoid leaving their parents in a sticky situation should talk to a financial adviser. They can tell you if you're eligible for a home loan, explain the different finance options available and help you decide what type of property and loan are the right fit for your circumstances.
If you're already in debt, you might find it harder to secure a favourable home loan. You should focus on paying off large and high-interest loans first, such as credit card debt, rather than lower priority debt such as a student loan. If you're finding it hard to manage multiple loans, you can talk to a financial expert about combining your debts into a more manageable monthly payment.
Don't forget that the state-funded First Home Owner Grant is available to all first time buyers who meet the criteria, offering $7,000 towards new builds or established properties.
Talk to our experts
If you need some advice about financing a home or getting out of debt, Debt Fix's experts can help. Call us now on 1300 332 834 for a no-obligation consultation.