The ‘Bank of Mum and Dad’ is exposing older Australians to the risk of financial abuse
- Written by Julia Cook, Senior Lecturer in Sociology, University of Newcastle
This article is part of The Conversation’s series examining the housing crisis. Read the other articles in the series here.
Young Australians who would have once been locked out of home ownership are increasingly relying on the so-called Bank of Mum and Dad to get a deposit or to guarantee a bank loan.
The Bank of Mum and Dad has become so large as a home loan enabler that the Productivity Commission says if it was an actual bank it would be somewhere between the fifth and ninth biggest mortgage lender.
While not all home loan assistance from parents is in the form of gifts, the Productivity Commission says the number of children receiving them from parents has doubled in the past 20 years.
Although this is helping young Australians get into the housing market (perhaps at the expense of pushing up housing prices), it is far from clear whether such financial assistance works well for the parents providing the support.
Transfers of $5,000 to $500,000
Financial elder abuse is the third most common form of elder abuse in Australia. The perpetrators of elder abuse are most likely to be adult children, with sons more likely to commit financial elder abuse than daughters.
Yet mortgage brokers, financial advisers and even government officials appear to be encouraging older people to provide financial help to adult children wanting to buy homes without considering whether there might be consequences for the parents.
To find out how intergenerational financial assistance works, we conducted interviews with 52 parents and adult children who have recently given or received financial assistance with home ownership.
The amounts transferred ranged from A$5,000 to $500,000. The average was $75,000. Some amounts were much higher.
The common themes in our interviews were a lack of clarity about whether the payments were gifts or loans, the mischaracterisation of loans as gifts, and undocumented agreements entered into without any documentation or legal advice.
‘Gifts’ offered without legal advice
Most lenders want older Australians to provide a “gift letter” stating the money they are providing to their adult child is a gift rather than a loan.
This is because a loan would reduce the amount the adult child could borrow from their lender, which may make it harder for them to get a mortgage.
Parents may feel obligated to provide “gift letters” even when they and their adult children regard the transfer as a loan.
There are no requirements for parents to obtain independent legal advice before signing such a letter and no cooling-off period.
Few of the parents we spoke to sought legal or financial advice.
Travis, aged 58 – who provided $50,000 to his son – told us:
No, didn’t need to. But I guess we didn’t think about it. We didn’t consider doing that, no. But it’s family, so it’s not needed, I don’t think.
Rosa, who became a guarantor to her daughter and also provided $10,000 to her son, said she “didn’t think about it too much”.
I just thought, why not, I guess. It’s no worries to me, and it really helps them along. […] I didn’t think about it too much because it was a simple process, really. And you do anything for your children.
Little protection from the banks
Australia’s Banking Code of Practice does little to encourage banks to support parents who provide financial assistance with home ownership to their children.
While it commits banks to “taking extra care” with customers who are experiencing elder abuse, the only documentation usually required for transfers from parents is a statutory declaration (gift letter) written by the parent to the adult child’s lending institution, which may be a different bank.
The code acknowledges that older people’s banks may only become aware of their circumstances “if you tell us about them”.
Shame, and the desire to avoid getting their adult children into trouble, make it unlikely that older people will report financial abuse to their bank.
Loans become unintended gifts
Many of the parents we talked to found it difficult and uncomfortable to talk about money. As a result, the parents and adult children often had different understandings of whether the assistance was a gift or a loan, and when (if at all) it would be repaid even when it was a loan.
This ambiguity extended to the parents’ financial positions, with most of the adult children in our study having very little understanding of whether their parent(s) could afford to assist them without compromising their own financial wellbeing.
John (aged 59) told us he gave $150,000 to his daughter and her partner to help them purchase a property.
When we asked his daughter Caroline (aged 32) whether the money was a gift or a loan, she responded, “a loan, yeah, definitely a loan.” However, when asked whether she had begun repayments she responded:
Not yet. I’m not quite sure, but I think we will work it out when it comes to it.
When we asked John the same question, he responded:
Yes, that’s a good question. We said loan, but I’m never going to see that money [laughs]. Maybe a little bit of it, but not the full amount. Definitely not. But we’ll see.
John’s decision to present the assistance as a loan, despite the expectation it would not be repaid in full, was echoed by multiple participants.
Although their reasoning varied, in general, donors who framed the assistance as a loan did so to either manage their children’s feelings of entitlement, to help their children develop “good” saving habits, or to try to avoid their children feeling dependent or infantilised.
The reasoning behind differing views of whether money is a gift or a loan is less important than the more general point that financial assistance of this type is often not defined clearly from the outset.
Little legal protection
Legally, in the absence of evidence to the contrary, funds provided by Australian parents to their children are presumed to be gifts.
This unfortunate presumption carries the assumption older adults’ money will be “passed down” to their children, representing this as the default state of affairs in the absence of evidence otherwise.
It means older adults’ money is represented as not entirely their own, and puts the burden of proof on them to prove that what they had understood to be a loan was a loan – a task made more difficult by the existence of a “gift letter” and the potential of financial elder abuse.
Our study does not find that intergenerational financial assistance is inherently exploitative, but it does point to risks – risks made more likely by the lack of protection offered to parents by banks and the legal system, their understandable desire to help their adult children, and the presumption that financial transfers are “gifts”.
Authors: Julia Cook, Senior Lecturer in Sociology, University of Newcastle
