‘Bank of Mom and Dad’ Now Popularity for Majority of First-Home Buyers

The so-called ‘Bank of Mom and Dad’ is now the go-to by majority of first-home buyers. This ‘bank’ represents over $20 billion in property loans following a 25% increase in the last year.

Family lending has grown in popularity due to the massive pressure on the mainstream banks, which have been made to increase rates and minimum deposit requisites as they rush to comply with new laws and forecast future controls.

A study by Digital Finance Analytics found that the Bank of Mum and Dad is now the No. 10 biggest lender in Australia, following Bank of Queensland and leading ME Bank.

Based on 52,000 interviews done for the last 12 months, 55% of first-time buyers are reported to now get financial aid from mum and dad. And the average amount involved for cash loans is $89,000.

Traditional bank lenders are currently experiencing immense pressure following the discovery by the royal commission of prevalent violations of responsible and ethical behaviour.

Now that two rounds of royal commission have been dealt with, the Reserve Bank governor said it might be harder for households to get home loans because of the discoveries.

Is Bank of Mum and Dad accelerating inequality?

Necessity is the main reason for the shift to Bank of Mum and Dad, as property values skyrocket. As a result, the mortgage lending sector is feeling an onslaught.

It is very difficult to save for a deposit, with many lenders asking for a bigger deposit in response to the tightening in the loan to value regulations.

The growing popularity of the Bank of Mum and Dad is a reaction to increasing housing values, against fixed income, and the equity growth people who have already in the market have benefitted from.

However, the opportunity can only be accessed by first-home buyers who have wealthy and generous parents. Children who don’t have rich parents face a major challenge.

Grattan Institute’s major report into housing affordability, released in March, issued a warning on the advent of the Bank of Mum and Dad, saying that it widens the gap between the rich and the poor. It opens the possibility of home ownership depending more on the success of one’s parents than on one’s own efforts.

In Sydney and Melbourne, first-home buyer activity has significantly risen following the state governments’ move to remove or discount stamp duty obligations for first-home buyers.

Concurrently, regulations enacted by the banking regulator to restrict interest-only and investor loans – some of which have already been adjusted – triggered a slump in investor lending, which is also believed to have lifted first-home buyer activity.