Consumer NZ research released in April 2022 found that the “Bank of Mum and Dad” was the 5th largest lender (after ANZ, ASB, Westpac and BNZ) when it came to helping their adult children into homes.
According to the research, 14% of families have supported their children to buy a property with an average financial contribution of $108,000. 3 out of 5 parents did not expect their money to be repaid.
In my opinion, this is a reflection of how hard it is for our young ones to get into their own homes these days. Back when Gary and I bought our first house in 1991, we paid $105,000 for a little 2 bedroomed house in Auckland and had a mortgage of $80,000 odd. The interest rate on that initial mortgage was 20%!!!! However, it is much harder to have a $700,000 mortgage at 5% than a small mortgage at 20%.
The challenge for the Bank of Mum and Dad is how to help your children without compromising your own financial situation.
Here are a couple of options:
- You can give your children money towards their deposit. There are a couple of fish hooks here for the Bank of Mum and Dad. Firstly, some banks insist that the money is given as a GIFT and not as a LOAN. Secondly, often the money is going to your child AND their partner. If the relationship ends, you may want the money that you have gifted to be used solely for the benefit of your child. You can enter into an agreement with your child and their partner that the money will revert back to you in the event of a relationship breakdown (so you can give it back to your child to start again) or the couple can enter into an agreement specifying that the gift from you does not constitute relationship property and will end up back with your child as part of an asset division.
If you are taking this option, you need to be sure that your gift/loan is not going to compromise your own retirement funding.
You can use the equity in your home for your children to use as a deposit for their first home via a guarantee. You may also be asked to guarantee the loan repayments as well. This is an option where you don’t have to hand over any cash. However, you will be liable for the mortgage repayments if your child can’t make them, so I would ask your child to take out mortgage instalment repayment insurance to cover the loan payments if they get sick and can’t work, and life insurance to repay the mortgage. Once there is enough equity in your child’s home for them to stand alone with the bank, you can apply to the bank to have the guarantee removed. In this scenario, the mortgage over your property and their property has to be with the same bank.
Looking ahead, if your children are well established, you may want to consider helping your grandchildren. You can set up a trust in your will to leave your grandchildren money, or you can give them money that has to go into their KiwiSaver. The latter is a more prescriptive gift as money into their KiwiSaver can only be used for a first home or for retirement. It can’t help them with study or medical costs, but it ties up funds if you have concerns about the money not being spent wisely.
You are welcome to contact me if you wish to get some personalised advice relating to your personal circumstances and I have some legal advisers that I can also refer you to for legal advice.
Janet Natta is a financial adviser and director of Smart Money Advice, offering investment portfolio construction and management services to clients throughout NZ, as well as comprehensive financial planning advice to assist clients to build and protect wealth to achieve their dreams.
DISCLAIMER: The information contained in this article represents the views of the author. It is based on information believed but not warranted to be correct. Any views or information, whilst given in good faith, are given with an express disclaimer of responsibility and no right shall rise against any of the authors or Smart Money Advice or their employees either directly or indirectly out of any views, advice or information.