Valuing the Bank of Mum and Dad

22 Feb 2022, Lynette McFadden

Valuing the Bank of Mum and Dad

Many of us of a certain age – and with children also of a certain age – will be acutely aware of the concept of the ‘Bank of Mum and Dad’. In fact, not so long ago I wrote about it, but seeing it more and more has persuaded me to highlight some new conclusions.

Essentially, it’s usually the short-term provision of funds to assist with a house purchase. This can be by means of acting as a guarantor, which I have seen come to great grief, or by lending (for some gifting) money. Providing funds by its very nature can become extremely complicated, given parents don’t always realise exactly what they could be getting into … and many of the recipients may not be as appreciative of this incredible gesture as they should be. It’s also an international phenomenon.

Research undertaken by Mark Bogard, CEO of the Family Building Society (London), discovered this;

The ‘Bank of Mum & Dad’ is something of a misnomer because most parents (and grandparents) don’t behave like banks. They may or may not utilize any legal frameworks or even take advice as well as apply any financial overview of their adult children’s affairs. In fact in some cases – beneficiaries had higher incomes than their parents.

There was also often no transactional record of what was happening or repayment schedule documented in writing.

And what happens when there’s more than one child and a sense of fairness weighs heavily on both the parents’ means and conscience.

Compare all of this to the latest requirements of banks here in New Zealand where the C.C.C.F.A. (Consumer Credit Contract and Finance Act) has created the scenario where lenders can use an extremely regulated approach to determining whether or not the applicant can afford loan repayments. Applicants must provide three months of recent consecutive bank statements, and these are reconciled against what’s been disclosed on the loan application.

The banks are looking for restraint with discretionary spending in the three-month period prior to a formal finance proposal. So, what’s ‘discretionary’ spending? The gym, daily coffees, eating out, clothes, Netflix, flowers, Lotto!

Yes, there is nowhere to hide, so if you look at actual banks and the ‘family bank’, I’d like to say this – if your parents are helping in any way, be it with funds, as guarantor, or support and labour at the new property, and you haven’t had to cut off your Spotify account, or reduce your number of bought coffee’s! You may be the last generation to derive benefits like this. After all, this world of ours is always changing.