Nick Bruining: Centrelink pension warning as parents called on to help struggling kids amid rates crisis

With fresh reports of a rising number of families facing significant mortgage stress, financial advisers are expecting a surge in calls from clients chasing advice on how they can help out their kids.

While the Bank of Mum and Dad has become an established source of funding for some, advisers warn that the practice could have long-term consequences.

In some cases, a form of elder abuse is often associated with a request where a refusal to provide assistance might lead to limited or no contact with grandchildren or other personal threats.

Amounts and circumstances vary but often involve initial assistance with a deposit for a house.

“Borrowers want to meet the minimum deposit levels, either to get them over the deposit threshold or to increase their equity to reduce the lender’s mortgage insurance premium payable,” said independent financial planner James Robinson.

Lenders’ mortgage insurance protects the lender if the borrower defaults on the loan and covers the gap between the outstanding loan amount and the amount the foreclosed property is sold for. The lower the deposit, the higher the premium, which can run into thousands of dollars and is simply added to the mortgage and paid off with the loan.

For the Bank of Mum and Dad to be effective in the case of an initial deposit, the money provided ideally needs to come “unencumbered”, with lenders usually requiring a statutory declaration to that effect.

Director of mortgage aggregator Purple Circle Financial Services Frank Paratore said that any amount provided by parents and structured as a loan must be declared as a liability, which could affect the loan approval.

“That’s not to say it is a big problem, it just needs to be disclosed,” Mr Paratore said. ”Lenders will still be looking at the borrowers’ actual savings and their capacity to service any debts.”

The loss of capital can have a short and long-term impact on a retiree’s own finances. The level of impact will depend on how much capital is available and the age of the lenders.

A 65-year-old couple with $400,000 in account-based pensions, for example, would be drawing $22,500 as the minimum payment each year. At that rate — and assuming conservative earnings of 5 per cent a year with the payments increasing at 2.5 per cent a year — the money runs out in their 89th year. That is slightly beyond their statistical life expectancies.

If they decided to give their kids or grandkids $50,000 as a deposit and maintain the same payment rate, the money runs out in their 85th year, which is less than their statistical life expectancies.

If the parents are receiving Centrelink income support, like an age pension, the gifted money less $10,000 will be regarded as a deprived asset for five years from the date of the gift.

It is counted under the income test and the asset test and may affect the amount of pension they can receive when it comes time to claim. Under the asset test, for example, the new age pension would be reduced by $120 a fortnight for the balance of the five years with a $50,000 gift.

“If there’s more than one child, parents become acutely aware of equality amongst their children,” Mr Robinson said. “They will often want to give the same amount to the other children which can exacerbate the problem.”

The preferred arrangement is one where the child borrows the money from the parents. The parents might have a formal loan agreement drawn up between the parents and the children, setting out the precise terms.

This way, there’s no misunderstanding over the basis of the money. The contract might even be used if a relationship breaks down in the future and there are questions over whether money was gifted or a loan.

“It can also be used to solve the equity issue between children. When the parents die and if the loan is still outstanding, that child’s share of the estate could be reduced by the forgiven amount of the loan balance,” Mr Robinson said.

A loan agreement would probably require the services of a lawyer and might be a worthwhile insurance policy against future problems.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association