Bank of mum and dad – when you must say no

These days, parents are often called on to do far more than teach their kids everything from toilet training to table manners.

In September 2017, research by comparison site Mozo, found the Bank of Mum and Dad is Australia’s fifth largest home loan lender for first home buyers. In fact, it turns out that parents are collectively lending around $65.3 billion to give their adult kids a leg-up on the property ladder1. Seven out of ten parents don’t expect to get their money back.

It’s a classic case of good intentions not always being rewarded with a good outcome – especially for parents who are in, or nearing, retirement.

But a parental helping hand isn’t just being extended to first home buyers.

Research by Finder in 20152 found 86% of parents provide financial help to their adult children, typically handing over cash to pay bills, fund holidays and even buy white goods.

Should you be helping out?

If your kids are sensible with money, and you have the funds available, it’s only natural to want to help out. 

However, it’s worth addressing four important factors to be sure your generosity won’t compromise your retirement plans – or develop a sense of dependency among your adult children.

1. Will your money provide a firm foundation?

Identify whether the financial support you provide your children is actually helping them to get ahead ‘financially’ in life and providing them with a firm foundation for the future.

2. Is the support one-off, short term or long term?

Is your financial helping hand going towards a one-off need such as contributing towards a first home deposit? Or could you be dipping into your cash funds indefinitely, for example, by helping to actually pay off your child’s home loan?

3. What are the financial risks?

Is there any chance you could be risking your own financial track record? Are you for example, putting your name to a financial liability? Have you been asked to sign any documents that you haven’t read and understood thoroughly?

4. Will it impact your relationship?

Family relationships can be complex, and parents can be caught between risking the relationship with their child if they refuse financial support, while also running the risk that the relationship could head south if things go wrong after lending a hand. 

Just as risky is the possibility that other siblings will have their nose out of joint if they don’t receive an equal level of support.

There’s no easy answer or one-size-fits-all solution 

This is an area where good advice can help. To begin with, our children need to realise that parents aren’t a perennial safety net or an endless source of cash. If you’re prepared, and able, to lend a financial hand, be sure everything is documented in writing and agreed upon by all parties. Any loans for instance should have clear repayment terms.

It can also pay to insist that your child takes out income protection insurance so their ability to pay you back isn’t compromised if they can’t work because of illness or injury.

Overriding all this is your own financial wellbeing. If you’re concerned about living a meagre retirement while your children live high on the hog at your expense, it’s definitely time to say “no”.

For tailored advice on the different ways to help your children achieve their goals, talk to your local expert today.