This article is for general information purposes only and reflects the state of information at the time of publication. It is not legal or financial advice. Always seek professional advice tailored to your specific circumstances before making decisions.
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 drawbacks of using the Bank of Mum and Dad (“BOMD”).
One of Australia’s Largest Lenders
In 2022, research suggested that the BOMD was the ninth 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 be challenging, especially for first-time homebuyers struggling to secure a mortgage loan. Some may turn to their parents for help, borrowing money to purchase a home. While there are advantages, there are also several drawbacks to consider.
The Upside
1. Low or No Interest Rates
One significant benefit of borrowing from parents is the potential for low or no-interest rates. Unlike traditional lenders, parents may lend money without charging interest, or at a significantly lower rate than banks or credit unions.
2. Flexible Terms
Borrowing from parents may offer more flexibility in repayment schedules. Parents may work out a payment plan that suits their child’s financial situation, whereas banks usually offer more rigid terms.
3. Avoiding Mortgage Insurance
Mortgage insurance is typically required by lenders when borrowers lack a large deposit or have a higher risk profile. Borrowing from parents may allow homebuyers to avoid this expense, making homeownership more affordable.
The Cautions
1. Emotional Strain
Borrowing money from parents can strain relationships. Money is sensitive, and mixing family and finances can be complicated. Even with willing parents, borrowers may feel guilt or obligation affecting the relationship.
2. Legal Issues
It is essential to have a formal agreement when borrowing from parents to avoid misunderstandings, disputes, or potential legal action.
3. Dependency
Borrowing money from parents can create dependency, affecting financial independence and decision-making. Traditional lenders may also perceive the borrower as overly reliant on parental support, impacting creditworthiness.
4. Inequality
Financial assistance from parents may create inequality among siblings or family members, leading to resentment and conflict if only some children receive support.
5. Limits on Parent’s Financial Capacity
Parents may have their own financial obligations limiting their ability to lend money. While willing to help, they may not be in a position to do so, potentially causing stress and disappointment for both parties.
Borrowing from parents to purchase a house can be viable for some homebuyers. However, it is essential to weigh the advantages and disadvantages carefully. While low or no-interest rates and flexible repayment terms are attractive, potential drawbacks include emotional strain, legal issues, dependency, inequality, and limits on a parent’s financial capacity. Open and honest conversations with parents are crucial to ensure both parties understand the risks and benefits and can make an informed decision.
