New player to become ‘fifth major bank’

Starr Partners chief executive Douglas Driscoll has said that the “bank of Mum and Dad” will emerge as a critical funder for first home buyers next year. His prediction comes after recent research from comparison website Mozo found that parents have lent out $65.3 billion in order to help young buyers break into the property market.

“In 2018, a new player will emerge and turn the big four banks into the big five,” Mr Driscoll said. “I’m talking about the bank of Mum and Dad.

“With escalating prices, it is more difficult than ever to enter the market. Not to mention first home buyers fall into a higher risk category for lenders as, generally, they don’t have a long job history or established wealth.

“Parents often have a large amount of equity in their homes and they’re realising it might be better to support their offspring now when they most need it by releasing some of that equity, rather than leaving an inheritance down the track.”

However, the CEO urges any parent considering this to have a formalised document professionally prepared by a solicitor to protect all involved.

The rise in the number of parents lending to their children has led to innovative products and new platforms to facilitate the process.

Fintech business Credi is one platform that enables friends, family and third parties to negotiate and arrange loans among themselves. The company recently appointed Andrew Chick, former CEO of the Australian arm of the Royal Bank of Scotland, to its advisory board.

Meanwhile, this intra-generational transfer of wealth was a crucial factor in the development of La Trobe Financial’s Parent to Child (P2C) loan product.

Introduced in 2014, P2C is aimed at FHBs otherwise depending on their parents.

With P2C, the parents choose the loan amount and stipulate the interest rate and then deposit their investment into the La Trobe Financial Australian Credit Fund, an externally rated managed fund. The child pays back the loan to La Trobe Financial while the parents receive a monthly return on investment.

“It became apparent to us that there’s a real option here,” La Trobe Financial’s chief lending officer, Cory Bannister, said. “We look at the transaction based on parents’ need to protect their investment and we were able to provide the facility to do that; they can invest it via our credit fund.

“They’re a registered investor protected by a registered mortgage and [the money is] then lent out to the children who… make monthly repayments. Often serviceability isn’t an issue; it’s just coming up with the deposit.”

[Related: Nearly a third of FHBs need help from parents]