Nick Bruining: Growing default risk for the bank of mum and dad as parents risk house and pension to help kids

The bank of mum and dad might not be the lender of last resort you hoped for, with a new report showing the over-50s are the new category of Aussies facing financial stress. Australia’s largest credit report agency, Illion, said the deterioration in mortgage-holder risk has affected all age groups, but has now spread to older Australians, “who are traditionally more shielded from economic peaks and troughs through lower levels of debt”. The rising risk of default for older people is almost double that of their younger counterparts. “While the default risk of Australians under 50 has risen by 2 per cent in the June quarter, the risk of Australians over 50 has risen by more than 4 per cent,” said Illion’s head of modelling, Barrett Hasseldine. Illion identified parents supporting their children while still paying off their own loans as one of contributing factors. “This may suggest that people are taking out mortgages later in life or parents are supporting their children while still paying off their own home,” Mr Hasseldine. said. “Also, people who have serviced debt for many years are still struggling under its weight.” Bunbury-based financial planner Peter Humble said there had been a noticeable rise in the number of retirees accessing funds to help their children. “Parents accessing lump sums from their super to help out their kids with debt servicing or unexpected expenses has really increased over the past few months,” Mr Humble said. The bank of mum and dad has become popular in recent years as first-homebuyers struggle to enter the housing market. While some parents might be in a position to make a direct cash contribution, others are being asked to act as guarantor for a first-time buyer’s loan. Significantly, if the buyer defaults on the loan, the lender will seek payment from the guarantor, potentially exposing the parents to big liabilities later in life. Mr Humble recommends those being asked to go guarantor make sure they fully understand the implications of a loan default, of losing a large amount of capital in retirement, and what that could do to their own financial plan. “To be honest, we would see a guarantor arrangement as being a last resort,” he said. ”You are better off giving them a lump sum of money so they can get a standalone mortgage instead of potentially exposing your assets if the guarantee is activated.” If a guarantee is triggered, a payment to your child’s lender is likely to be viewed as a gift by Centrelink. In some extreme cases, you could potentially lose your house and the age pension at the same time. “Perhaps structure a lump-sum payment as a no-repayment debt, where if the house is sold earlier than anticipated — maybe because of a relationship break-down — you might get all or some of your money back from what’s left over,” Mr Humble said. Financial counsellor support is available through the National Debt Helpline on 1800 007 007. Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association