Stretched first-home buyers are increasingly turning to the Bank of Mum and Dad. What are the options, risks and advantages of helping your kids get a foot on the property ladder?
Life changes with children. The joys and frustrations ripple on through the years – as does the financial drain. From pocket money to uni fees, the drawdown on the Bank of Mum and Dad lasts a full two decades – and now even longer. As property prices have pushed upwards, so have the number of parents helping their kids get a foot on the property ladder.
Currently, first-home buyers (FHBs) are out in force. Data from CoreLogic shows that 24 percent of purchasers nationally are buying for the first time, and 27 percent in Auckland. Though no official figures are kept for those receiving a parental boost, banks and lenders report that many new home buyers whose families have the means are getting a financial leg-up from loved ones.
“Anecdotally, we’ve seen an increase in the reliance on the Bank of Mum and Dad to support first-home buyers – either an outright gift or by using the family home as security,” says Kiwibank spokesperson Kara Tait.
Meanwhile, Westpac is seeing “ongoing enquiries and demand” for its specially-tailored Family Springboard home loan, which allows parents to help with their children’s deposit.
“Saving for a deposit is tough, so if customers have family members who want to help them into their first home, Springboard allows them to do so without having to gift a lump sum up front,” says Mark Dunmore, Westpac New Zealand’s head of home ownership.
John Bolton, founder of Squirrel Mortgages, says parents have emerged as key players in the financing of first-home purchases.
“Our average first-home buyer at Squirrel is borrowing somewhere between $500,000 and $600,000, and over half of those first-home buyers are getting parental help,” he says.
Cash or guarantee
Most help falls into one of two categories: parents either gift or loan cash, or they act as guarantors of their child’s loan. Cash is king, of course, but this requires having money in the bank or liquid assets. Ultimately, most familial funds supporting today’s FHBs comes from the property wealth accumulated by previous generations.
“There are two sources of the cash deposits we experience from clients,” says Bolton. “One is inheritance from grandparents; money flowing through the family. The other is parents selling investment properties.”
As a parent, if you have the available funds, it’s a simple way of getting your child into a home that they otherwise wouldn’t be able to afford. It can also give parents ongoing control of their investment.
“We often see either Mum or Dad come into the property as a joint owner, or do a side arrangement that acknowledges they’ve a share in the property,” Bolton explains.
However, it’s worth remembering that gifting or lending money to your children can have an effect on their ability to borrow, as mortgage lenders pay particular attention to an applicant’s ability to save and live within their means.
Fortunately, families without Daddy Warbucks’ deep pockets can still help their children buy a home. As long as you have enough equity in your home, you can act as a guarantor of your child’s loan. A FHB can then use the equity to boost their deposit.
It’s an arrangement Bolton recommends to FHBs who don’t have a 20 percent deposit – even if they don’t need parental help obtaining or servicing a mortgage – as borrowers can avoid paying mortgage insurance and can save thousands of dollars.
“Kids are buying older these days, most are in their thirties and don’t want to involve their parents. But when we explain that even if they don’t need parental help there are still financial benefits, most people go, ‘Wow, that’s money for nothing. Let’s sign up’.
“The impact can be significant. Above 80 percent LVR (loan-to-value ratio) you typically don’t get cashbacks, but below 80 percent you could get $4,000 to $5,000. Also, your interest rates over 80 percent are going to be mid-4 percent, whereas under 80 percent LVR you could get a rate of 3.99 percent. It can save $10,000 to $15,000 over three years.”
While the benefits of borrowing from Mum and Dad are clear, there are also risks. On top of the financial implications of loan default, the ups-and-downs of family life can create added problems. It’s why, from the beginning of any agreement, everybody needs to be aware of their obligations.
Juliet Moses, a partner at TGT Legal in Auckland, is a specialist in relationship property issues and has first-hand experience of family transactions that have soured.
“Sadly, there are a lot of disputes and litigation about these issues. I see a lot of it in my work, and it’s awful to see relationships and families being torn apart,” she says. “Almost everyone thinks that it will never happen to them, but no-one is immune.”
From the beginning, transparency around expectations is very important, to mitigate against any problems. So, too, is ensuring everything is legally documented.
“For parents to protect any money they pay to their children towards the purchase of a house, it’s best to do it by a loan, not a gift, even if they’ve no intention for it to be repaid,” explains Moses.
“This is because of the risks of the child losing half that money on a relationship breakdown.
“Generally speaking, the Property (Relationships) Act applies to couples who have been living together for three years. The home they live in will be relationship property, which means that on a separation its net value will be divided equally between the parties, regardless of how it was funded,” says Moses.
“Gifts from third parties can lose their character as separate property in these circumstances, so a loan is a much safer option. And it’s very important to document the loan as such, with lawyers drawing up an agreement. There have been court cases about whether the money was intended as a loan or a gift, so a document clearly setting that out will remove any argument.”
As FHBs have returned to the market, bank lending to new buyers has increased 37 percent to $810 million in February, from $591 million two years earlier, according to the Reserve Bank. But with median house prices at $560,000 nationally, and $850,000 in Auckland, affordability remains an issue.
For most young people who are juggling rent, jobs and the prospect of starting a family, saving a 20 percent deposit and servicing a mortgage, wherever they live, is still a challenge.
Little wonder, then, that when it comes to bricks and mortar the next generation of home buyers is increasingly turning to the financial institution that has their interests closest to its heart: the Bank of Mum and Dad.
Read more...[Download PDF]