Rising property prices, larger deposit requirements from lenders and the higher cost of living has resulted in many young adults no longer being able to save a large enough deposit to enable them to purchase a home of their own. These first home buyers are increasingly appealing to the bank of Mum and Dad to assist them in attaining that first step onto the Kiwi property ladder. Parents are often keen to assist their offspring in this manner, but they should consider any assistance they offer carefully before committing themselves, to ensure that in doing so they don’t sacrifice their own financial security in retirement.
Buyers with a 20% deposit can usually access better lending rates and conditions at the bank and accordingly we often see parents wanting to contribute money to top up their child’s deposit funds in order to reach this magic 20% mark. Before agreeing to such a top-up parents should consider the following:
- Will the advance to their child be a gift with no expectation of repayment or a loan?
- If the advance is a loan what are the repayment requirements and what interest, if any, will be charged?
- If their child has a partner who will benefit from the advance and that relationship breaks down what are the repayment expectations in relation to their child’s partner?
Parents need to ensure that they and their children are clear on the terms of the advance being made and ensure that those terms are properly recorded in a binding legal document to provide protection to both parties. They may also find that the bank requires them to sign a statement confirming the monies advanced to their child are a gift, so that the advance doesn’t affect their child’s liabilities, which the bank is assessing against the bank’s lending requirements. Parents need to be wary of this where they have an expectation that the advance will eventually be repaid to them, as the signed bank gift confirmation can be used as evidence by their child or their child’s partner against any repayment requests the parent may make.
Where parents do not wish to gift or loan money to their children, or do not have the cash available to do so, we see them being asked by their child to instead guarantee the child’s obligations with the bank. Providing a guarantee can be much riskier to the parent than simply loaning or gifting money and parents should consider the following before agreeing to be a guarantor:
- The bank will probably want a mortgage over the parent’s own property as security for the guarantee – i.e. their own home will be on the line should there be any default in repayments by their child.
- Is the guarantee limited to a set amount or unlimited?
- What obligations of the child to the bank does the guarantee cover – just this loan or all of their child’s obligations e.g. new loans, credit cards, overdrafts or even guarantees their child gives to the bank for the borrowing of others?
Parents should consider whether there are other options available to their child that will help the child attain a loan. Borrowers that can demonstrate a history of saving and who have no hire purchase obligations or store credit cards are more attractive to lenders. Parents can teach and demonstrate this to their children in the hope that such actions by their child may help reduce any financial assistance their child might need from the parent in the future.
New home builds also are something to consider as banks have different loan ratios for a new home build and often only require a 10% deposit from the borrower for a new home loan.
Achieving a home of our own is a dream most of us have and parents naturally want to, help their kids achieve this dream too. We recommend, however, that parents seek financial and legal advice before committing to any course of action. A child achieving their home ownership dream shouldn’t come at the cost of the parent’s financial security for their retirement.