Bank of mum and dad fuels $34 billion mortgage ‘headache’

First homebuyers who leaned on the bank of mum and dad for their purchase last year are at a higher risk of losing their homes following recent interest rate rises, new research shows.

Fuelled by a mortgage lending spree, 2021 was a record year for real estate transactions financed by the bank of mum and dad.

Close to 60 per cent of first homebuyers turned to their parents for financial assistance to get into the market and these types of loans totalled $34 billion.

Most parental help was with deposits – often from the parents drawing out equity from their own homes – or the parent going guarantor on the loan.

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But experts warned that those who borrowed money from their parents to fund a property were twice as likely to default on their mortgage within five years.

Many first homebuyers relied on financial help from their parents to get into the market.

The reasons varied, but one prominent risk factor was that the parental assistance was backing up homebuyers who may otherwise not have been able to afford their purchases.

These buyers would face a higher risk of mortgage stress were rates to continue climbing.

National Property Group data showed the risk was most pronounced in the parts of Sydney and regional NSW where there were considerable property price rises over 2021, followed by steep price drops this year.

Risk areas included Blacktown and Ryde, along with regional NSW markets Albury, Queanbeyan and Coffs Harbour, where there was widespread bank of mum and dad assistance, coupled with wild swings in prices.

National Property Group’s Don Harb said the high rate of parental support in some areas was a danger now that prices were beginning to fall across much of Sydney.

“Our data identifies key markets across metro and regional NSW where home values are starting to fall, which increases the risk of negative equity for some previous purchasers.

“For bank of mum and dad buyers and lenders these trends could signal that it’s time to assess their financial future,” Mr Harb said.

Digital Finance Analytics director Martin North said a large proportion of parental assistance was usually funded with equity from the family home.

This usually meant a lower deposit on the purchase, which would be a risk as prices fell. There was also a risk for the parents drawing out equity from their home.

“The bank of mum and dad was a big factor in getting people into the market last year,” Mr North said.

Prices are beginning to drop in much of Sydney.

“It was predicated on the idea there was lots of equity in their house. That looks to be evaporating. Without that, there will be less buyers able to afford (current) prices.”

Nigel Horne, principal of Albury-based Nigel Horne Real Estate, said rapidly rising prices had put pressure on first homebuyers.

“Throughout our dealings with buyers, (family) financial assistance to fund a deposit has been a factor,” Mr Horne said.

“Since the pandemic took effect in 2020, property values have increased significantly in our region. In my experience, demand has not slowed and there is still a shortage of properties.”

There was a chance even more first homebuyers would call upon their parents for financial support this year, but according to Mr Horne, younger buyers will also need to reconsider their purchasing criteria.

“For first homebuyers, this might mean the style, age, or size of the property they purchase now may differ from what they could have bought before March 2020.”

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Bank of mum and dad fuels $34 billion mortgage ‘headache’

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