The Bank of Mum and Dad

As more and more young people look to their parents to front up with the money to get them into their first home, Claire Connell discovers there are pros and cons.

It can be tough for first-home buyers in the current market. House prices are at an
all-time high after a boom, and for some young people, getting together a deposit can be hard. 

That’s why many people look to their parents as an option. 

Many experts, without shame, suggest in columns that young people ask ‘The Bank of Mum and Dad’ for help with finance. Yes, it can be the most generous bank in New Zealand, with low, or no, lending criteria. But should children be asking?

Some parents are feeling pressured into giving money, even when they can’t afford it, at a time when they’re already worried about how they’ll live in retirement. And children are coming to expect a handout. 

It can get messy, too. Parents can get caught out when children can’t meet the repayments. 

And what happens when your child’s marriage ends and they split from their partner? Will the ex still benefit from the parents’ money? 

If you’re a parent or guardian looking at ways to help a child into their first home, we’ve researched the pros and cons of giving them money.

Why it’s good for parents

You’d be helping
It’s normal for parents or guardians to want to help their children get a head start in life. By helping them into their first home, however you do it, you’ll be offering practical help. 

You might feel that you’re getting a good income now, and have savings to spare, so you’d have money (or equity) to offer.

There could be financial benefits
Maybe it will work for you, too. If you invest in the property or buy into a house alongside your child, then you’ll get the benefit of any capital gain, especially in areas with strong demand. 

You might view buying another home as an investment, which also gives your child somewhere to live. Your child may be living in it short-term, but for you it could be a long-term investment opportunity.

Your child might leave home!
Many parents, especially those in Auckland, face years with an adult child living at home, because flatting can be expensive. But, if you were looking forward to enjoying your empty nest and they just won’t leave, helping them into a house could be one way to get your space back.

It can be practical
At some point, your children will probably inherit a family home which, for many Baby Boomers, will be mortgage-free. You may feel that it’s more practical giving money earlier, when your child really needs it, rather than making them wait for an inheritance that might not come for years. 

And people are living longer, so your children may have to wait until they’re in their 60s before you die.

Why it’s bad for parents

It could all go sour
If you sign on as a guarantor for your child’s mortgage, your own money is at risk. If your child isn’t meeting the mortgage repayments, you’ll get a knock on the door from the bank. 

Being a guarantor means you’re legally locked into covering the mortgage. And your home could be sold to recover the debt. Where will you live then?

Breaking up is never easy
If you give money to your child and their partner, what happens if they break up? Your ‘ex-in-law’ could get half of your kind gesture. 

Likewise, if you invest in the property alongside your children, what happens if one party wants to sell? What if your child doesn’t look after the home?

Less money for you
If you front up with $50,000 for your child’s first-home deposit, that’s $50,000 less for you to spend in retirement. If you’re a Baby Boomer, you’ll have less time to make up that money gap. And if you’ve retired with no passive income, you’ll never make it up.

I still want to help

If you’ve decided to help out one or more children into their first homes, there are some important things to think about.

Discuss all the scenarios
Financial expert Mary Holm says you should ask everyone involved to sit around a table together and outline all the worst-case scenarios. Death and relationship break-ups are the main risks, Holm says. 

Write down a solution or outcome for every scenario – including if the child can’t pay the money back. Financial adviser Lisa Dudson says: “Treat it like a formal business situation.”

Keep things open and honest
Mary Holm says while your best intention might be to keep this fair between all the children, in reality this may not happen. One child may have a disability, or just bad luck in life, or maybe they’re a young, single parent and need extra support.

“Get all the kids together and see how everyone feels about you giving money to one. The others might be fine with it. But if one child is just being careless, the others might not be.”

Holm says if children find out later that money was given in secret, it can tear families apart. “There’s nothing that divides a family like the feeling that kids are being treated unequally.”

Take it seriously
Helping out is a big deal, and can have a big impact on your finances. Think carefully before agreeing to dish out cash. 

Be practical and don’t let emotion get in the way, or feel pressure from either your kids or other parents in your social circle. 

Avoid borrowing or going into debt in order to help. Make sure your child knows the seriousness of taking on a 30-year mortgage.

There are options
They are many ways to help. You can be a guarantor on the home loan, gift money to your child, give them a low-interest or no-interest loan, or buy the property together. 

Different methods have pros and cons, so check out the details. Be clear if your money is a gift or a loan, and if or when you expect the money paid back. 

Holm says: “People know their kids, but the trouble is people want to think the best of their kids, too.”

Speak to experts
Talk to a financial adviser about the options that are best for you. Retirement is ‘your time’ after years of hard work, so make sure you’ll have enough money left to enjoy it.

Prepare for the worst-case scenario – what if your child can’t pay the money back? Get legal advice. Make sure any arrangement is signed off with a lawyer, and isn’t just a discussion over a few drinks. 

Are you really helping?
Dudson says you should ask yourself if helping sends the right message. 

If your children are living at home, on good incomes, and aren’t paying much, or any, board, they may be better off than you.

“How hard is it for two people to save NZ$80,000 over a few years for a deposit, if they really knuckle down? Are they really hard done by?” Dudson says.

She says when her parents bought a house, interest rates were close to 20 per cent, compared to 4 per cent now. 

“I think we’re a bit too quick to say, ‘Oh, it’s so hard for young Johnny these days to get into the housing market’. I’m not quite sure I buy that.”

The wider impact
Holm says there are bigger and bigger gaps between the haves and have-nots in New Zealand, backed up by research. Many parents could never afford to help.

“People who help their kids are increasing that inequality – that’s a worry. I appreciate that individual families probably aren’t going to think, ‘Well, I won’t lend to my kids because of this growing inequality’ – but it is there.”  

And weve got some tips for the kids . . . 

If you’re thinking of buying your first home, but a deposit is out of reach, you might be thinking about getting outside help. Here are some tips:

Avoid asking
Lisa Dudson says kids shouldn’t approach the subject with any expectations, or ask family members outright for money for a house. Avoid any sense of entitlement about money you may feel you’re ‘owed’. Have a reasonable and fair discussion with your parents if you’re stuck, and see what, if anything, eventuates.

Step up
Do your homework. Have you been saving hard? Have you done the maths on a mortgage? Being able to prove to your parents – and the bank! – that you’re already on your way to having a decent chunk of deposit can give you more credibility. 

Think of the bigger picture
Think hard about what that money means for your parents’ retirement. They’ve worked hard for that money, and you’ll likely want them to have a stress-free remainder of their life. 

If you borrow the money, are you definitely going to be able to pay it back? 

Don’t get caught up in the hype
There’s so much talk about first homes, it’s easy to think a house should be your main, or perhaps only, financial goal. Perhaps all your friends are buying their first homes, and you’re feeling left out. 

Kiwis love property and, yes, many times it makes sense to buy your first home as soon as you can. But the property market has changed a lot since your parents were young. Buying isn’t right for everyone, and you may not have the ability, or the desire, to sign up for a mortgage just yet.

‘No’ isn’t the end
If your parents have enough money to even consider lending you some, you’re better off than most kids in New Zealand, whose parents may still be renting. If it’s not the right time for your parents, they can’t afford it, or there are other reasons involved, accept their decision. 

It might just be the motivation you need to save even harder to reach your goals.

Published 22 August 2019

This article does not contain any financial advice and has not taken into account any particular person’s circumstances. Before relying on it, we recommend you speak with a financial adviser.  This story reflects the views of the contributor only. Content comes from sources that we consider are accurate, but we do not guarantee that the content is accurate.


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