More and more Aussies are receiving “early inheritances” from their parents to get a foot on the property ladder, as experts argue kids need the windfall today – not when they’re in their 60s.
Grace Pizarro is hoping to buy her first home in Sydney within the next two years and will receive an early inheritance from her parents to help her do so.
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The 25-year-old social media manager has already saved up a decent deposit on her own and has been told she will receive between $100,000 and $200,000 to help with her deposit.
“They worked very hard. They are both working class people. But they’ve been very financially savvy and they’ve both made decent wages over the years,” she told news.com.au.
Ms Pizarro said it was her parents who initially raised the issue with her, with her two other siblings also set to receive financial support to buy their first homes.
She’s hoping to buy a two-bedroom apartment in Sydney’s inner west and is looking at properties around the $700,000 to $1 million mark.
She’s also been living at home with her parents to help save up her deposit.
For Aussies of her generation, Ms Pizarro said there was a feeling that it just wasn’t possible to buy property without some kind of parental help.
“I find that all of my friends, if they are purchasing a place, are getting financial support from parents and work in very high paying jobs,” she said.
‘Doesn’t make sense to wait’: Impact of an early inheritance
Australia is on the cusp of a massive $5.4 trillion intergenerational wealth transfer over the next two decades as Baby Boomers pass property, superannuation and investments to their descendants.
Psychologist and behavioural economist Phil Slade said when the concept of inheritances were popularised, many people were only living until their 60s or 70s.
“Now, we’re expected to live until we’re 100 and be quite healthy until we’re at least 90,” Dr Slade told news.com.au.
“But over those years, inflation, the market economy and also the generations that we’re going to see and interact with are shifting and changing.”
Dr Slade said to imagine two scenarios.
In the first, your kids inherit a substantial sum in their 60s when their mortgage is almost paid off, the kids have left home and retirement is around the corner.
In the second, they get support in their 30s or 40s. It helps them buy their first home, navigate the cost of raising kids, start a business or simply breathe easier.
While the dollar amount might be the same, the impact isn’t.
“It’s like (an) investment. I could sit on this $100,000 or this $1 million for the next 40 years, or I could invest it. You can invest it in shares, you can invest it in property, or you can invest it in your family,” Dr Slade said.
“Investing in people is still an investment in your future. The fact that your inheritance is split out among your children a little bit earlier, thinking about that as an investment that may not have a financial return but an emotional return I think is really important.”
Dr Slade said people generally needed a leg up when they were in their 30s or 40s and when they were raising kids of their own.
“It makes more sense to have that injection of capital or that shift of capital happen at that time in life. It doesn’t make sense to wait,” he said.
“The final thing is just the joy. The joy of being able to see your wealth impacting the lives of the ones that you love, (not) waiting until you die in order for that to happen.”
Early inheritances a growing trend
Research from mortgage broker network Resolve Finance found 53 per cent of Aussie parents had already provided financial support to help their kids buy a home, or planned to do so.
Contributing cash towards a home deposit was the most common support (48 per cent), followed by allowing their kids to live at home rent-free to build savings (43 per cent).
Others are acting as guarantors of their kids’ loans (27 per cent), providing interest-free loans (16 per cent) or considering buying a granny flat or dual-occupancy dwelling to support their kids (8 per cent).
Perpetual Private financial adviser Elysse Lorenti said she was seeing a number of her clients giving their kids an early inheritance, with many doing so to help them get into the property market.
“It’s really been the last few years that we’ve seen it with cost of living becoming more of an issue and how expensive the market is becoming more of an issue as well,” she told news.com.au.
“What we’re seeing is that it’s just so much harder for young Australians to get ahead, so it’s not necessarily that parents are trying to help them build wealth, they’re just trying to help them get a foot on the ladder in the first place.”
Ms Lorenti is based in Sydney and works with a high net worth client base, so she is seeing early inheritances given as the most common form of support over going guarantor among her clients.
“The most common amount would be about $100,000 to $500,000. It’s really to help with the deposit, that’s really the main motivator,” she said.
She agreed that the hardest times financially were generally in your 30s and 40s, when you’re likely to have a mortgage and high childcare costs, with people tending to get more financially comfortably as they get older.
“That is when you need the money. So it does make sense to bring it forward if you can afford to do it,” she said.
“The other part of it is then the parents can see the impact it has on their children’s lives and enjoy seeing them thrive.”
Resolve Finance’s most recent General Rent Report found lack of a sufficient deposit remained the biggest barrier preventing or delaying prospective buyers at 58 per cent, followed by rent and other living expenses at 41 per cent.
Melbourne University’s HILDA report found there has been a steady increase in the receipt of inheritances and financial gifts from parents.
Between 2018 and 2022, 7.2 per cent of people reported receiving inheritances, compared with 4.8 per cent between 2001 and 2005.
Over the same period, the number receiving financial gifts from parents (which tend to be smaller) increased 10.5 to 15.8 per cent.
Most recipients of inheritances were still over 55, receiving an average inheritance of $275,619. This was followed by people aged 35 to 54 years, receiving an average inheritance of $156,663.
Most recipients of gifts were in the 15 to 24 age bracket, receiving an average of $2736. This was followed by the 25 to 34 age group, getting $17,105 on average.
In 2021, the Bank of Mum and Dad was estimated to be worth $34 billion. The Productivity Commission found that if it was an actual bank, it would be somewhere between the fifth and ninth biggest mortgage lender.
Parents told to not jeopardise own finances, have open conversations
Ms Lorenti said the “biggest risk” with giving an early inheritance was that parents could jeopardise their own retirement and financial situation.
“I think many parents are driven by wanting to provide their kids with the best life possible and to give them every opportunity they possibly can,” she said.
“They naturally want to help their kids but sometimes they haven’t considered what that support would mean for their own financial situation.
“It can be really hard to separate the emotion from the logic or the practicalities of what’s actually affordable.”
She gave the example of a client who wanted to give her three daughters $500,000 each following the death of her husband.
“That was $1.5 million and it just wasn’t affordable. She could see that. We prepared financial modelling and showed her, if you were to give away $1.5 million her wealth (would have) dropped quite significantly as a result and then there wasn’t enough to last her lifetime,” Ms Lorenti said.
She recommended having a financial adviser look at your financial situation to see how you could be impacted if you were to give away various amounts, in order to make an informed decision.
Dr Slade also urged families to have open and honest conversations, along with explicitly acknowledging if there were any expectations around giving the money, such as an expectation your kids will take care of you in the future.
“There is a danger in turning generosity into dependency for sure … The goal isn’t really to make life so easy that children don’t have to develop financial muscles,” he said.
“There’s a line. You’re not trying to create dependency. You’re just trying to have a leg up and build that generational wealth.”
Dr Slade said it was easy for those from older generations, including himself, to tell people to just work harder, save more and spend less.
But while that advice was partially correct, he said the reality was many young people weren’t being dependent or not financially responsible, but rather were dealing with a completely different market.
“In my parents’ day, the average value of a really good family home was equivalent to a year’s wage,” he said.
“Now, that’s absurd. So it makes sense that we have to do things differently now … Definitely the conversation is key to that.
“Talk about money. Talk about your fears. Talk about the emotion that sits with money. Don’t just talk about money, talk about the emotion that sits behind it. That’s going to be the key to unlock better financial behaviour.”
Dr Slade said even the label “inheritance” had a sort of entitlement wrapped up in it.
“If you think about it more like a wealth transfer rather than inheritance, I think it’s a much more constructive way to look at it,” he said.