Parents could need to rethink plans to help children finance a home as expensive loans bite. Finding a cheaper mortgage should be a priority for those who can.
Bank of Mum and Dad (BOMD), one of the nation’s biggest property lenders, is in trouble because many children who were helped buying property now struggle because of rising interest rates and cost-of-living expenses. These pressures are putting at risk the financial welfare of their parents.
More than half BOMD borrowers are under financial stress (where spending exceeds income), compared with about 28 per cent of property buyers who relied on their own resources, says Martin North, principal of Digital Finance Analytics (DFA), an independent consultancy.
Parents are jeopardising their own financial welfare. AFR
Many of the young buyers borrowed maximum amounts when interest rates were at record lows and are struggling to meet increased repayments after the recent round of increases (particularly those who took out one- and two-year fixed rates that are coming to the end of their terms), North says.
“Those who use BOMD to access the housing market also tend to have less experience of managing money, budgeting and saving. That means they were already more likely to get into financial difficulty,” he adds.
Parents who lent deposits, gave cash, used equity in their own home or underwrote deposits to help their children buy a first home are also under pressure because their asset base and cash flows have been reduced, which affects their ability to “help” their children again, North adds.
The unregulated lender was estimated to be one of the nation’s top 10 sources of residential property deposits, with average amounts per BOMD-funded mortgage about $89,000 at the height of last year’s property boom, DFA says.
Some parents contributed as much as $250,000 towards their children’s property, its analysis shows.
Loans are believed to total about $35 billion, more than the Australian operations of Citigroup or HSBC Australia, DFA says.
Kirsty Robson, a financial counsellor at the Consumer Action Law Centre, says she regularly deals with older clients facing financial stress because they have responsibility for their children’s debts.
AMP Bank analysis also highlights growing concern among borrowers, particularly those who bought a property in the past year when prices were at record highs.
It finds that two-thirds of property buyers are concerned about meeting their mortgage repayments and are cutting back on food and clothing to make ends meet.
There have been six successive rate rises in the past six months, causing national average prices to drop about 5 per cent from December highs – with falls in Sydney of about 9 per cent and in Melbourne almost 5 per cent, says CoreLogic, which monitors property prices.
Since the beginning of last year, the number of first home buyers has almost halved, while the number of people refinancing has increased about 23 per cent, says AFG, the listed mortgage broker.
Refinancing is expected to increase rapidly because fixed-rate loans (including loans split between fixed and variable rates) worth more than $450 billion are due for renewal over the next 18 months, an analysis of bank results shows.
Refinancing hit another record of almost $9 billion in August, government figures show.
Most fixed rate loans were locked in when rates were between 1.95 per cent and 2.09 per cent as cash rates fell to 0.1 per cent.
Lendi, another mortgage broker, says the number of refinancing inquiries jumps more than 150 per cent on the first Tuesday of each month, when the Reserve Bank of Australia meets to consider cash rate increases.
Owners whose equity falls below 20 per cent are stuck with their current lenders’ terms and conditions, and are ineligible for lucrative incentives and loan discounts being offered to new borrowers by competing lenders.
Further, many borrowers (particularly those who took out big loans when rates were at recent record lows) are also being squeezed by the 3 per cent serviceability buffer stipulated by the Australian Prudential Regulation Authority, used by lenders to assess capacity to cope with rising costs.
Under the APRA stress test, new home loan applicants must show they can afford monthly repayments at three percentage points more than they are applying for, or the bank’s pre-set floor rate (whichever is higher). A floor rate is the minimum rate a borrower will be charged.
But borrowers who do qualify are considering their options as loans come up for renewal.
Lenders continue to adjust rates after the October cash rate increase, but the lowest rate is 4.09 per cent, says Sally Tindall, research director of RateCity, which monitors rates and fees.
“But the average existing customer is paying 5.36 per cent,” says Tindall.
That means a principal-and-interest, owner-occupier borrower with a 25-year, $1 million loan refinancing to one of the lowest rates of 4.09 per cent this month will save almost $24,000 over two years.
The calculation includes future RBA rate changes forecast by Westpac and switching costs.
Try to stick to your current loan term and make extra repayments to pay it off as soon as possible, says RateCity’s Sally Tindall. 
“Lenders are passing on full hikes to their variable rates but cutting their offers for new customers,” says Tindall about why borrowers should consider a new lender.
In addition, about 30 lenders are offering mortgage cashback offers to attract new customers ranging from $1500 to $10,000, subject to loan size.
“Refinancing is booming as people seek out lower rates and that’s forced the banks to put better rates on the table,” says Tindall. “The catch is, they are only offering these rates to people willing to jump ship.”
Mortgage brokers claim competitive lenders are slashing up to 2.8 percentage points off standard variable rates, which vary from about 3.54 per cent to 7.39 per cent, according to Canstar, which monitors rates.
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