If Australian parents were a bank, they would be the ninth largest mortgage lender in the country – bigger than the Bank of Queensland and knocking on Macquarie's door.
For many first-time buyers, a loan from their parents (the so-called "mother and father's bank") is crucial for collecting the money for a home loan and getting approved for any loan.
But on July 1[ads1], as part of the recommendations of the bank's royal commission, the big banks will introduce new rules for this type of lending.
Guardian Australia spoke with experts and the Australian Banking Authority to better understand the complex changes. Adult children can expect more discounts and lower approval rates, while parents can end up with debt if the real estate market is turning.
What is "mother and father's bank" and how common is it?
According to latest statistics from Digital Finance Analytics, 20% of first-time retailers rely on some form of parent loan when applying for a mortgage. The average size of parental contributions is $ 70,000.
And it used to be even more common. In June 2018, 60% of new buyers borrowed money from their parents.
In total, parents borrowed a total of $ 30 billion for their children from April 2019. It's more than HSBC or Citigroup.
Of course, each family is different, and some parents will charge interest, some won & # 39; t, and some are gifts. But the mortgage market is highly exploited, which creates risks for both parents and children whose payments fall behind or housing prices fall.
The average age of borrowers is 31 and the average age of parenting lenders is 56.
Does that I am a guarantor?
There are many ways parents help their children financially – and they should not be confused with each other.
Sally Tindall, research director of the finance city Rate City, says there are three main roads: one parent becomes the guarantor of the loan, becomes a lender or gives his children a cash gift.
"Although the guarantor is not required to make regular monthly home loan deductions, if their child defaults on the loan, the lender may ask them to go up and make repayments," she says.
It can also be a gift. The banks will ask borrowers for a letter from their parents that clearly states that it is a gift and not a loan, otherwise they would have to factor it in their decisions.
What are the changes? all major banks adopt the new banking code of practice.
Essentially, if many your deposits are provided by your parents, the banks will now be more thorough when trying to find out if you have good savings habits yourself.
" Basically, they will ask more questions about it – and I suspect they will be less generous if you have money from Mom and Dad, says Martin Nord for Digital Finance Analytics.
"It's more forensic than it used to be. They didn't ask earlier. They don't really care. But now they will."
"They might ask for more bank statements, to see your expenses and for To see if there is a history of storage Many banks ask for a breakdown in cost categories to make an assessment of how much free money a person actually has. "
There will also be additional guarantees on the loan agreement phase. If the parents are guarantors, they will be warned about the risk of taking out their children's loans.
All warranties will be given a three-day cooling off period before signing contracts so that they can think about it and get legal advice instead of being pushed at the moment to repay a loan to a loved one.
"Being a guarantor of a loan can be a good way to help children or close relatives buy a house or start their own business. However, there is a serious financial commitment that should be carefully considered," says ABA.
If I borrow from my parents, what should i do?
Prepare for more questions, prepare for lower loan approval – and start saving.
"You should still be very, very careful about their ability to repay the home loan, "North says." You are twice as likely to default in the first five years if you got help from mom and dad and never got into the savings.
"You need proof of savings experience. Suddenly, money coming in from your parents may not be taken positively by the banks. They can still give you money, but they can give you less."
He emphasizes also that parents and children should get their appointments ready.
"It is very important for parents and children to agree on them. Is it free? Is it a gift? What is the interest rate?" He says.
"What happens if things change – if parents divorce or differ? What happens if they standardize, what happens if the child differs from their partner – or something else goes wrong?"
Borrowers should also be conscious whether the parents can afford the loan – especially if they have their own mortgage. 19659002] "It's great if you are one of those kids who have wealthy parents, but if your parents aren't rich, there is risk on both sides of the equation. For the parents and the child."
Tindall says borrowers should also Look at your own budgets before splurging.
Having a guarantor can allow you to "borrow without a decent deposit saved up," she says. "While this may feel like a winning lottery ticket, it's important that you sit down and make sure you're comfortable getting into that level of debt.
" Don't trust your bank to tell you how much you can afford to pay back. Make the amounts yourself and make sure you can meet the repayments comfortably, even when you have a factor in things like rising mortgage rates, the arrival of a new baby or a change in the job situation. "
If I am a parenting loan to my children, what should I do?
" Think twice, "says Nord. Especially if you draw on your own mortgage to lend to your children.
"If you are a parent and you actually deduct equity from your property, you need to think very seriously about the consequences of it down the track. Can you really afford it in retirement? What if house prices do not go up enough to see you in retirement?
"Many people rely on the value of their property to pay the home loan. If property prices do not rise, you are in a congress."
Tindall adds: "Parents can instinctively be willing to do everything needed to make your child happy, but it should never be easy to enter into a warranty offer.
"Before signing the paperwork, take the time to think about how things would go out if your child could not pay the home loan."
And again, documenting the exact terms.
"You can sometimes be a little too generous and make it too easy for your child, North says. "If they haven't learned about saving, it's a problem."
"If you have two or three children, you must think of equality over the children. Do you have three, can you afford to do it three times? effect will this have on the housing market?
Nord believes that the slaughter of mother and father will help keep house prices low – or at least not as high as the peak.
According to DFA's analysis, the vast majority of parent loans on the east coast – in Sydney, Canberra and Melbourne – where the real estate search has been strongest and young buyers need help.
"I think We have definitely had a mother and father's bank that support the growth in house prices over the last couple of years," says North.
"My modeling suggests that there may be little recovery from the falls we see now, as the frequency cuts and APRA's loan solution comes through. But nothing fundamentally will change – we won't see house prices escalating rapidly." 19659002] However, he says there are probably other forms of incentives to help first-time buyers who come up – in addition to the 5% election announcement – for example, additional rates.
"The reserve bank, the cashier – everyone wants people to use to buy property to support the failing economy. It's a great incentive, from a political point of view, to get first-time buyers to buy at the moment. I wouldn't stay Surprised to see more incentives coming down the track to pull people into the market. "And the prospect of a weak housing market is what should make parents more cautious about lending to their children for housing.  "I think it's not likely to see strong house price growth over the next decade," North says. "The boom cannot happen again. People should not necessarily expect that the magic money machine will be around much longer." Wanted to Help Their Children
"But now the question is – is the Australian fixation to enter the market a smart alternative in today's environment?"