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How to Help Your Children Buy a Home

Property

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9.6.21 |

Become Wealth Editor

Five ways to help your children climb the property ladder, without causing yourself to fall off a cliff!

The Kiwi dream of homeownership might seem to be getting further away for many young adults.

Lofty house prices, combined with high rents amid a cost-of-living crisis, mean that saving for a deposit might feel like filling a bucket with a teaspoon.

As a parent, you may be considering ways to help your adult children in achieving their dream of homeownership.

But, before racing to their rescue, it's important to carefully consider your financial situation, your child's needs, how such an arrangement might affect your family dynamic, and your own financial future.

However, there are ways parents can lend a helping hand without turning into walking ATMs. Let’s dive in.

The Rise of The Bank of Mum and Dad

In New Zealand's ever-competitive housing market, the "Bank of Mum and Dad" has become a familiar term.

It refers to financial assistance provided by parents or close family members to help their children purchase a home. It comes with upsides, but also downsides.

A study by Consumer NZ found the "Bank of Mum and Dad" is the fifth-largest home loan lender in the country, contributing an estimated $22.6 billion in financial support.

The research found 14% of families had supported their children financially to buy a property, with an average contribution being $108,000.

The most popular form of assistance was contributing towards a deposit, with 61% of parents opting for this method. Three out of five parents did not expect it to be paid back, Consumer NZ found.

“We’ve reached a point in New Zealand where it’s no longer enough to do all ‘the right things’ to buy your first home – to get a job with a good income, save furiously and cut back on the ‘nice to haves’,” said Gemma Rasmussen, head of campaigns and communications at Consumer NZ. Here at Become Wealth, we disagree, as our lending team help motivated people into their first home on a regular basis by doing just these steps! Though of course, a little help from parents is always a welcome addition for those who are fortunate enough to receive it.

“The role of the Bank of Mum and Dad is more pivotal in the first home buying process, but it also means that we’re seeing a greater social divide of who gets to buy a first home, and who does not,” she added.

“The overwhelming majority of parents (87%) either offered to or were happy to help get their children on the property ladder.”

Rasmussen said people recognise that buying a first home isn't as straightforward a process as it was 20 years ago, which is why many parents are so willing to help.

“In 2002, the average house price in New Zealand was $186,000, which was six times the average income of $29,432 per year. Fast forward 20 years to 2022, and the median house price was $890,000, which equates to more than 15 times the median income of $56,836.”

So, how can Mum and Dad lend a hand?

1. Be a Mortgage Guarantor

With interest rates on the rise and the cost of living squeezing wallets tighter, getting that all-important home loan is tough. Banks have been tightening their belts, making it tougher to qualify for a mortgage, especially for that first, crucial step onto the property ladder.

One option in New Zealand is for parents or someone they know to be a guarantor for their mortgage.

What exactly does it mean to be a guarantor, and is it the right move for you?

What Does It Mean to Be a Guarantor on a Home Purchase?

Being a guarantor for someone else's mortgage means acting as their financial backup plan.

It's a big responsibility that can have serious consequences, so it's crucial to understand what you're getting into, including with appropriate legal advice.

Imagine your child wants to buy a house but can't qualify for a mortgage on their own. The bank might ask you, the guarantor, to step in and vouch for them.

By agreeing to be a guarantor, you're essentially telling the bank, "If my child can't make their mortgage payments, I will."

This means if they default (stop making payments), the bank comes after you to recover the money. That includes the remaining loan amount, interest, and potentially even seizing your assets like your car or house if you can’t cover it.

Advantages of Being a Guarantor

It makes it easier for your child to obtain a mortgage and get a foot in the front door of their first home.
They may qualify for a lower interest rate.

Disadvantages of Being a Guarantor

Being a guarantor means you could be putting your own bricks and mortar on the line. Here's why you should approach it with caution:

You're on the hook: If the borrower defaults (stops making repayments), you're liable for the entire loan amount, plus interest! The bank can even seize your assets (like your house) to recover the money.
Strained relationships: Money troubles can tear families apart. If things go south, your relationship with the borrower could suffer.
Future loans affected: Being a guarantor can impact your ability to get loans yourself.

Don’t Sign a Guarantee Blindly

Before diving in, consult a suitably qualified lawyer to ensure you fully understand the implications and are making an informed decision.

There will be legal documents involved in the guarantor process. Don't just skim and sign.

Understanding what you're agreeing to is crucial. This isn't just about crossing your fingers and hoping for the best. You need to be 100% comfortable with the potential financial burden before becoming a guarantor.

Before you agree, ask these questions:

Why are you being asked? Is it a close family member you trust?
Can you afford it? Could you handle covering the entire loan if needed?
Is the borrower reliable? Are they good with money and likely to make repayments?
What type of mortgage is it? Fixed-term loans are generally less risky than open-ended ones.
Are you comfortable with the contract?
What risks is the buyer taking? Do they have appropriate personal insurance in place? For instance, should they fall ill and not be able to work.

2. The Cash Injection (A Gift)

There are plenty of less risky options you can take instead of becoming a guarantor.

Gifting a lump sum of money towards a deposit can significantly improve your child's chances of securing a mortgage.

A cash injection is a straightforward approach. But it’s important to ensure it's a genuine gift – no sneaky payback expectations!

This helps them avoid further questions when they apply for a mortgage.

Advantages of Providing a Cash Gift to Help the Home Purchase

It’s simple.
Helps your child without the burden of repayment.
No risk of damaging your credit score, or you potentially meeting future liabilities.

Disadvantages of Providing a Cash Gift

Reduces the amount of money you have available.
There might be tax implications for large gifts.
You lose the potential to invest the lump sum.
There can be relationship property issues. For instance, if you gift the sum to your child, who is in a de facto relationship or married, then that relationship fails, your child’s spouse could walk away with half the gift.

3. Offset Mortgage

In the situation of an offset mortgage, a parent's savings can help their child (or another borrower) save money on their mortgage interest, while keeping their money safe in their own accounts.

Here's how it works:

The bank connects your child’s mortgage to your savings account.
The total amount in your account gets deducted from their loan amount for interest purposes.
Let's say their mortgage is for $500,000 and you’ve got $50,000 saved. Normally, they'd pay interest on the entire $500,000. But with offset savings, it's like your savings chip in – the bank sees your $50,000 and reduces their loan balance for interest calculation to $450,000.

Advantages of Offset Mortgage

Your child pays interest on a smaller amount, saving them money each month.
Over the entire mortgage term, this can translate to significant savings.

Disadvantages of Offset Mortgage

Complexity. Plus, not all banks allow linking accounts from other people (like parents) to offset mortgages. Check with the bank offering the offset mortgage to see if this is an option.
While you're helping your child, you're also giving up the potential interest on your savings. Make sure you're comfortable with this trade-off.
This is because the money is essentially "offsetting" the loan balance, not sitting there accumulating its own interest.
There might be a better use for your savings, like an investment with a higher potential return (though with more risk) compared to the interest saved on your child's mortgage.

Mortgage Offset: Check the Details

There might be a monthly fee for offset savings, so factor that into the equation.
Some banks have limits on the number of accounts you can link for offsetting.
The more savings in the linked accounts, the less interest you pay. Try to keep them topped up for maximum benefit.
Savings held in a trust or company typically can't be used for offsetting.

4. Jointly Owning The Home

If your kids are thinking about buying a house but are falling short on the deposit or loan approval, you may consider teaming up with them.

This is where you and your child buy the house together, splitting the ownership and responsibility for the mortgage. It can be a great way to pool resources and make homeownership a reality.

Joint Ownership, Keep in Mind

The bank will need to assess everyone involved financially to ensure they can handle the mortgage together.
You'll likely need a lawyer to draw up a clear ownership agreement and an advisor (like a mortgage broker) to help navigate the loan options with the bank.
Once again, you’ll need to consider all eventualities. What happens if one party falls ill and can’t work, so can’t make their share of repayments? What happens if one party wants to sell before the others?
Discuss everything upfront – from how much each person will contribute to the down payment and mortgage payments, to how long you plan to co-own the property and pay for ongoing property-related expenses. An "exit strategy" is crucial.

Advantages of Joint Property Ownership

Provides your child with an ownership stake in a property.
You can personally benefit from the property's appreciation in value.
You could benefit from a rental income if you decide to rent the property out.

Disadvantages of Joint Property Ownership

You're financially tied to your child, potentially your child’s spouse, and the property.
Disagreements about the property's management or sale could arise. Legal issues may eventuate.
It will likely complicate your financial situation.

Before jumping in, everyone involved should get independent legal advice and consider financial advice too. This ensures everyone understands their rights and responsibilities as co-owners, and what implications there might be in other financial or legal areas.

Remember, with joint ownership, everyone is on the hook for the entire mortgage, not just their share. So, if one person can't make payments, the others are responsible for covering the shortfall. This can strain relationships, so make sure everyone is financially committed and prepared for the long term.

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5. A Personal Loan

You could provide your child with a loan to help them purchase a home. This can be a formal loan with a set repayment schedule and even a set interest rate, or a more informal arrangement.

Personal Loan Advantages

Offers you more control over the terms of the loan compared to co-signing a mortgage.
Can potentially strengthen your relationship with your child by helping them achieve a goal.
Minimises some risks. For example, of your adult child’s relationship failing.

Personal Loan Disadvantages

There's a risk of your child defaulting on the loan, which could damage your relationship.
You may need to consider the tax implications of the loan. If you’re receiving interest repayments, that’ll nearly certainly be taxable income.

Help Your Children Buy a Home, Key Considerations

Before providing financial assistance to your child for a home purchase, it's crucial to have open and honest discussions. Here are some essential points to consider:

Affordability: Ensure your child can comfortably afford the mortgage repayments, property rates, and ongoing maintenance costs. Without your help, the bank or mortgage lender will make a thorough assessment of this.
Impact on your own retirement plan: Consider how helping your child might affect your retirement lifestyle.
Formal agreements: If co-signing a mortgage, providing a loan, or even providing a gift ensure you have a formal agreement outlining exactly what the money is, and explaining any terms and conditions.
Tax implications: Understand any potential tax implications associated with gifting, co-ownership, or loaning money.

The Bottom Line: Offer a Leg Up, Not a Free Ride

Helping your child buy a home can be like handing them the keys to their future, not just a house.

It goes beyond a simple financial transaction. It's about providing a strategic springboard for their future.

Through open communication, careful planning, and professional advice, you can make a decision together that sets them on a path to long-term financial stability.

Imagine the countless memories made within those walls – a testament to your love, support, and the smart start you provided, not just with cash, but with guidance and collaboration.