Cash-Splash
The market fell 0.9%, after whipsawing back and forth quite aggressively each day this week.
The Federal budget was handed down on Tuesday. For the sake of keeping the weekly information to a minimum, and retaining your attention without dozing off, if you would like to view a summary, click here.
There was a fascinating article in the Financial Review last week entitled “Huge rise in Bank of Mum and Dad loans” and is a reference to the assistance provided to children to enter the residential property market. “More than 60 per cent of first home buyers are relying on their parents to help buy their properties, with the average contribution rising to a record $93,000 – an increase of about 26 per cent in the past 12 months.”
It went on... “The Bank of Mum and Dad (a colloquial expression to describe parental lending) is estimated to have outstanding loans of about $35 billion, which makes it the nation’s ninth-largest mortgage lender – bigger than AMP, Citigroup and HSBC Australia, according to analysis by Digital Analytics, an independent market analyst.”
I personally know of quite a number of parents who have done the same. And it makes perfect sense. The banks will put the borrower through no end of regulatory hoops, requiring collateral beyond what many can provide, loan to value ratios might be difficult to achieve, loan servicing terms may well be too onerous to satisfy even at the current average loan rates of around 3-4%.
Enter Mum and Dad; often requiring no collateral, no equity interest and certainly in the cases I’ve seen, charging interest at half the rate the banks are charging – around 2% or so.
Mum and Dad see it as a win as they would have been earning 0.1% to 0.6% in a term deposit and the kids get access to funds cheaper than the banks and with less hooks. Assuming they eventually pay it back to Mum and Dad, that is...