An Open Letter to Parents

This is an open letter to parents who are thinking about helping their kids buy their first home.

In my book I was pretty blunt (and a tad dismissive) about hitting up the parentals:

“Should I get my parents to go guarantor? No way, Jose.”

And … no one listened.

In fact, Digital Finance Analytics (DFA) has found that the ‘Bank of Mum and Dad’ has around $34 billion in loans, with parents forking out on average $90,000 to their kids.

So let’s look at it from the parents’ perspective.

It’s natural to want to help your kids. They’re your flesh and blood … and the very people you’re counting on to change your incontinence pads in a few years’ time.

Besides, if you’ve done well, you should help them out, right?

My parents-in-law offer a good working example: they bought their inner city Melbourne family home in the eighties for less than a hundred grand. It’s now worth close to two-and-a-half million bucks.

Yet a decade ago their (then single) daughter would schlep over to “millionaires’ row” for dinner, and complain that she couldn’t afford even a two-bedroom flat this side of Bendigo.

Come on, help out the kid!

Well, here are three things to keep in mind before you sign on the dotted line.

First, if you’re struggling or still have outstanding debt yourself, you’d be mad to go guarantor for anyone. As they say in the airline safety demonstration, always fit your own oxygen mask first.

Second, consider what could go wrong.

The most important one being that it can cause a rift in the family. I know you think that’ll never happen, but what if your princess’s prince turns into a frog and leaps off with half your deposit? Ribbit!

Or rates could rise, the market could cool, and your kids could be left really struggling. In fact, DFA suggests that kids getting a handout from their parents are three times more likely to default on their loan in the first five years.

Finally, and crucially, you may be inadvertently robbing your kids of one of life’s great financial achievements.

Case in point: all my wife could afford was a tiny studio apartment. She painted it herself and even got her brother to install a discarded oven she found on the side of the road. It wasn’t much, but it was all hers.

Whatever you do, I’m sure it’ll be the right thing for your kids. Just go into it with your eyes wide open.

Tread Your Own Path!