The “Bank of Mum and Dad” was hit with stricter prudential controls amid issues on lenient standards that could pose a financial risk to borrowers and lenders, according to a report by the Australian Financial Review.
The “Bank of Mum and Dad” is one of the country’s top property lenders. It is a term used to describe parents lending to their children for property purchases. Parents typically assist with the deposit, repayments or free rent while their children save for a deposit for a home or investment property.
The Australian Prudential Regulation Authority was concerned about deals between parents and children that result in big financial liabilities for the former in their retirement.
Lenders are also wary that children being helped with property deposits or repayments do not regularly save or are unable to make repayments over the term of a loan.
In addition, there are high-profile legal actions wherein parents were heavily burdened from aiding children without the involvement of lawyers, or contracts, according to the Australian Financial Review.
“‘Bank of Mum and Dad’ only works in rising markets,” Martin North, Digital Finance Analytics (DFA) principal, told the Australian Financial Review. “Parents are being asked more questions by lenders because of concerns about the impact of rising debt from loans to their children on their retirement plans.”
In response to the new Banking Code of Practice that starts at the end of June, National Australia Bank (NAB) and other lenders are implementing tougher terms.
NAB introduced new guidelines for “Bank of Mum and Dad” lending that “complements the law and, in some areas, sets higher standards.”
“We are ensuring that what we communicate with our customers is transparent, clear and timely. We’re also ensuring that our customers are treated respectfully and fairly, and have the benefit of credit processes that support a responsible approach for lending,” NAB said in a statement.
Under the new measures, loan guarantors will undergo improved scrutiny of their suitability by providing more information about how it will impact their finances and awareness of responsibilities.
In addition, a process is being introduced to protect co-borrowers. When co-borrowers don’t benefit substantially from the loan, lenders must ensure they understand the risks, according to the Australian Financial Review.
Commonwealth Bank of Australia, ANZ and Westpac Group, which includes Bank of Melbourne, BankSA and St George Bank announced that they would implement similar changes.
