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Is the ‘bank of mum and dad’ the future for home loans?

By Alana Su-Navratil
29 January 2024 | 11 minute read
Eliza Owen reb

The “bank of mum and dad” may soon be the most viable option for first home buyers navigating their way through the property market.

With interest rate rises leading to a diminished borrowing capacity of as much as 30 per cent in 2023 for many would-be home owners, it’s clear that buyers are looking beyond banks for the funding needed to secure property.

In a recent episode of REB’s Secrets of the Top 100 Agents, Eliza Owen, head of residential research Australia at CoreLogic, explained: “The profile of the buyer in the market is wealthier or they’re being supported by someone who’s wealthier.”

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“So, think, ‘bank of mum and dad,’” Ms Owen said.

Ms Owen highlighted a lot of new loans that are being approved lately have larger sums for deposits.

One of the reasons is due to the rise in older Australians gifting money to their kids to buy property.

According to the 2020 Productivity Commission, inheritances and gifts more than doubled since 2002 and are expected to rise as much as fourfold in real terms between now and 2050, given the current rate of wealth accumulation.

As well as gifting funds, other forms of parental financial support have also been shown to improve the possibility for young Australians to enter the property market.

New research by the Australian Housing and Urban Research Institute (AHURI) identified that transfers between parents and children in the form of co-residence without paying board eases the likelihood of transitioning into home ownership by 40 per cent.

Ms Owen stressed that the sum of money required for a deposit was harder to save for in 2023. In the September 2023 quarter, the flow of income into household savings was 1 per cent – the lowest since 2007.

“That’s going to mean less money going towards accumulating a deposit,” remarked Ms Owen. “That could create a little more risk in the mortgage market and see more motivated selling if people can’t service their mortgage.”

Borrowing capacity is now 32.5 per cent lower than at its peak in October 2021. Over the last quarter alone, the average loan size declined 3.1 per cent, pushing more Australians out of the property market.

The challenges associated with securing finances for home ownership is critically increased by the insecure and inadequate employment.

Concerningly, unemployment is expected to rise to 4.2 per cent by the end of 2024.

The challenges associated with higher unemployment will be coupled with a widening disparity between median home values and what Australians can realistically afford for a deposit.

Ms Owen predicted “the potential reduction in interest rates is going to create a lot more competition and urgency in markets that are already undersupplied, and deposit hurdles could get away from us”.

Listen to the full conversation with Eliza Owen here.

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