Bank of Mum and Dad and the Struggle of Young Borrowers

First time buyers home buyers, particularly, the young people often receive some help or contribution from their parents especially now when buying a residential property has become much harder than it was before. Not only has the process become more complex. Rise of interest rates have been taking place and properties are much more expensive nowadays.

Bank of Mum and Dad is one of Australia’s mortgage lenders. How does this work? It’s simple. Parents and their children should know what they are getting themselves into. Each one has responsibilities in terms of how repayments should be made.
According to recent reports, Bank of Mum and Dad is in trouble and it’s mainly because the rising interest rates and the increase in cost-of-living is putting so much pressure on their children making it harder for them to do repayments. Unfortunately, this could also affect the financial welfare of their parents and put them at risk.

What caused the struggle?
Many young future homeowners maxed their borrowing capacity when interest rates were at record lows. Unfortunately, when the recent increases happened, these young borrowers are struggling to meet the repayments. According to experts, those who use BOMD to secure housing and enter the market tend to have less experience when it comes to managing finances so financial difficulties are more likely to happen. Thus, parents who lent funds to their children are in a complicated situation now that their savings have been greatly reduced due to failure of repayments.

Analysts have shown that parents have contributed as much as $250,000 to their children. According to the DFA, loans have reached $35 billion in total which is seen to surpass loans with Australian operations of Citigroup and even HSBC Australia. Many financial counsellors are currently dealing with clients facing financial stress due to their children’s debts.

Refinancing
According to data gathered, refinancing has increased about 23 percent since last year and is expected to increase rapidly due to a major reason. Fixed rate loans, which both includes fixed and variable rates that are worth more than $450 million are due for a renewal over the next year. In fact, inquiries have already been rising. It doesn’t help that many borrowers are experiencing some pressure due to the new APRA stress test, wherein new home loan applications must show that they can afford monthly repayments 3% more than what they are applying for.

Experts are pointing out that refinancing is currently booming as many are looking for lower rates, which also impacts how the banks are offering rates.

Here are some tips on how you can do better in terms of refinancing.

-Suppose you are coming off a fixed rate, it’s better to avoid the revert rate your lender will offer because this is typically their standard variable rate which is most likely higher than the rates offered to new borrowers.

-Always check websites to compare and identify which lender is offering the most suitable rate for your situation.

-Cashback rates can be tempting, but it could cost more money if the rate is much higher than other competitors.

-You should also consider sticking to your current loan terms and if possible, make extra repayments so you can pay off the loan as soon as possible.

-It’s important to find out how much your property is actually worth because sometimes, the best variable rates are offered to those who own more than 30 percent of their property.