Parents prefer to be 'Bank of Mum and Dad' than leave inheritance

According to a quarterly survey by independent funding provider Household Capital, almost half of parents that have the opportunity to financially support their children would prefer to contribute towards property related expenses.

The survey, which included more than 250,000 members, revealed 23 per cent indicated they would like to contribute towards a first home deposit and around 22 per cent would prefer to contribute towards a mortgage repayment. 

As property prices around Australia continue to soar, it was noted that many respondents indicated that they would like to help with home costs in combination with other forms of support; for example helping with a first home deposit in addition to paying school or university expenses. 

Dr Joshua Funder, CEO of Household Capital, said the housing market can be a “double-edged sword” for property-owning Baby Boomers who are parents. 

“While toasting the gains they have made on their investment, they are also dealing with the fact that their children are struggling to purchase, especially anywhere in proximity to their parents,” said Dr Funder.

He said choosing the timing of a bequest, when children need it most, rather than waiting until death is an important option for the whole family.

“An oft-cited critique of reverse mortgages is that they diminish future bequests, ‘disinherit the kids’ or ‘spend the kids’ inheritance’ and lead to potential intergenerational conflict,” said Dr Funder.

While that was often the case for borrowers who were adults during WWII, the situation was different for Baby Boomers.

“The increased longevity of retirees means bequests are delayed well past the time when the retirees’ children face their biggest financial needs,” said Dr Funder.

“By this time any bequest has reduced value to support major life expenses, such as the purchase of a first home or educational expenses. 

“It is longevity itself which has disinherited the children and grandchildren of long-lived Baby Boomers.

“Traditional bank reverse mortgages did not provide a structured mechanism to satisfy the long-term retirement income needs of borrowers, nor to responsibly transfer home equity to meet the needs of subsequent generations at a time when they incurred major lifetime capital expenses. 

“As part of a life-cycle theory of household capital accumulation and decumulation, access to home equity to make intergenerational transfers can enable the bequest motive rather than inhibit it.

No strong evidence of intergenerational wealth transfers remains

While playing the Bank of Mum and Dad may be attractive to those who can afford it, a recent research paper on intergenerational wealth transfers estimates there was no “strong evidence” that parents are actually giving their children large payments for property purchases.

The report by the Productivity Commission said while there was a lack of data available to determine the size or prevalence of parental assistance, private sector surveys estimate total lending from parents was around $35 to $92 billion. 

Productivity Commissioner Lisa Gropp said inherited wealth only contributes around a third to the persistence of intergenerational wealth – with the rest coming from other things parents give to their children, including education, networks, values and other opportunities.

“By the time people receive inheritances, they’ll usually be well into middle age – about 50 years old on average. This limits the impact inheritances have on opening up lifetime choices and opportunities about career and family,” Ms Gropp said.

“Gifts, on the other hand, tend to be much smaller and flow to younger people just starting out in life.”

The data shows close to 90 per cent of transferred wealth (around $100 billion in 2018) remained in the form of inheritances, passed on following death.

[Related: Bank of Mum and Dad overstated: Productivity Commission]