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Delayed retirement and other costs of being the Bank of Mum and Dad
About six out of 10 Australian and New Zealand share market investors agree that financial support from parents or relatives is increasingly essential to help younger generations build financial security.
Those are the findings of a survey conducted by online trading platform Stake in May.
Stake surveyed more than 2,000 Australian investors and more than 1,000 New Zealand investors who held ASX shares or overseas stocks in May this year.
The survey found that 73% of respondents were concerned about the intergenerational wealth gap between older and younger Australians.
It also revealed that many parents had already helped their children financially.
But at what cost to them?
The rising role of the Bank of Mum and Dad
Among the Australian survey respondents who were parents, 39% said that they had supported their children to buy a home.
This is probably the most common way in which the Bank of Mum and Dad is assisting young people financially today.
Home ownership, particularly in the larger and more expensive capital cities, is becoming increasingly out of reach for average earners.
Firstly, there's the time it takes to save a deposit.
According to the 2024 Housing Affordability Report published by CoreLogic and ANZ Group Holdings Ltd (ASX: ANZ), it now takes a median of 10.1 years in the capital cities to save a 20% deposit.
One of the reasons it takes so long is because home values often rise faster than people can save. In FY24, the median Australian home price increased by 8% or $59,000 in dollar terms.
Secondly, higher interest rates are making it not only hard to service a loan but also difficult to get finance in the first place.
This is particularly so given APRA's longstanding direction to the banks to add a 3% serviceability buffer to the loan rate when assessing an applicant's capacity to make their repayments on the loan.
The report found an 80% loan-to-value (LVR) home loan with an interest rate of 6.27% eats up 48.3% of household income in the capital cities, which is well above the threshold for 'mortgage stress' of 30%.
So, this is why the Bank of Mum and Dad is increasingly stepping in to help their kids onto the property ladder.
Baby boomers have benefitted significantly from rising home values over the past three decades. Therefore, they know better than most how important home ownership is for a comfortable retirement.
How does the Bank of Mum and Dad help?
Typically, parents will cover the shortfall on the deposit or take equity in their child's first home.
Others agree to be the guarantor on their child's mortgage and/or provide rent-free accommodation in the family home for several years to allow their children time to save their deposits.
While all of this demonstrates love, support, and kindness among parents, they do pay a price themselves.
Delayed retirement one of the costs: survey
According to the Stake survey, 11% of parents who helped their children buy a home said it delayed their retirement.
Fourteen per cent said it had limited their ability to travel.
Another 14% said it had decreased their ability to save money or invest in shares, property, or other investment assets themselves.
According to the Rethinking Retirementreport published by Colonial First State, the Bank of Mum and Dad may be expanding into superannuation.
The report found three in four Australians are planning to leave some of their super to loved ones.
The post Delayed retirement and other costs of being the Bank of Mum and Dad appeared first on The Motley Fool Australia.
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