5 ways your parents can help you buy a home
Property ladder feeling out of reach? Here's how your parents might be able to help.
4 July 2023
Here’s what you’ll learn:
- Ways parents can help kids with buying a home
- How to protect all parties when buying with Mum and Dad
- Other things parents can do to help you achieve your goal
- Questions to ask at the outset to make sure it’s a good idea
In 2022, Consumer NZ found that 14% of all families had supported their kids financially to buy a property, making an average contribution of $108,000. Auckland parents were most likely to do so, with nearly 60% stepping up, the Consumer NZ research found.
Unsurprisingly, Consumer NZ calls the bank of Mum and Dad the fifth largest bank in New Zealand behind the big four, ANZ, BNZ, Westpac and ASB, when it comes to owner-occupier lending.
The most popular forms of assistance from Kiwi Mums and Dads were:
- Helping home buyers with their deposit (61%)
- Allowing them to live at home rent-free (25%)
- Acting as a guarantor (18%)
- Buying a property in partnership with them (11%)
- Buying a property on their behalf (8%)
Parents are wise to put a lot of thought into it before making their generous offer because it will inevitably affect their financial situation in the years ahead.
Where are they getting the money from? Most are using their own savings, some are using home equity as security, an inheritance is being used, some take on debt, and others sell a property or other assets.
You should seek reliable legal advice before committing anything.
Talk to finance advisers, lawyers and mortgage experts about how best to make your home purchase with the help of Mum and Dad, they’ll have seen it all and they’ll know the precautions to take. They’ll help make the arrangement fair for both you and your siblings if they’re also hoping for help in the future.
Your parents’ main options are to provide the money as a gift, as a loan, or with them acting as guarantor on the loan. Co-ownership is another avenue they can take.
1. Parents use equity in the family home
Some parents are borrowing against the family home to help their children with their house deposit. Usually this will be in the form of a gift, in other words, an amount that doesn’t need to be repaid. Consumer says 3/5 parents don’t expect to see the money again.
The parents providing this gift of funds will have to sign a statutory declaration stating that the money is a gift and not expected to be repaid.
Gifting a deposit to a child who is in a relationship, will mean, in the absence of a contracting out agreement, the gift will become relationship property so legal advice should be sought.
If it’s a loan, the bank will take this into its calculations, as part of the borrowing you’ll be doing for the new home so it makes things a bit more complicated.
Crucial in all this is to have legal documentation, a Deed of Acknowledgement of Debt, which your solicitor will draw up, its aim to protect all the parties involved.
2. Parents make a loan to the children
If Mum and Dad are providing a loan then it must be very clearly marked as such. If the parents give the loan without charging interest, then it might be challenged in court as something that’s considered a gift, so clearly structure it as a loan.
It’s worth knowing, some banks will require that the loan is not repayable for a minimum period or only when the property is sold.
If parents are helping a couple buy a home , then their lawyer will likely suggest a relationship property agreement. In this “contracting out agreement” the couple would be saying, they acknowledge that in the event of a break up, the money Mum and Dad lent us would be paid back first.
Parents may use the family home as security against a loan.
3. Parents act as guarantor on the home loan
In this case, Mum and Dad guarantee that the mortgage repayments will be made and offer their home as security if they’re not. For this, parents have to have good equity in their family property.
Acting as guarantor, your parents are saying they will cover any missed payments, so it’s a big responsibility. You want to make sure that your parents are well placed to do this and that everyone understands the consequences of all this.
In most cases with the guarantor arrangement, 80% of the loan is secured against the child’s property and 20% against the parents’ property.
Being a guarantor on a home loan can limit the amount your parents can borrow themselves in the future. The general advice from advisers on the mortgages.co.nz panel is that the loan is structured in such a way that the child repays the parents’ loan quickly so that they’re clearing this loan as soon as possible.
Never make guarantees unlimited and set a finite term for the period of the guarantee, is the common recommendation from financial advisers and lawyers.
4. Parents offset part of a child’s mortgage
This is when Mum and Dad might have investment money in the bank, a term deposit or savings account which is earning very little interest. Some New Zealand banks will link this investment account to an offsetting mortgage in a family member’s name and the accounts all have to be in the same bank.
In effect, the parents' investments reduce the mortgage balance and it has a compounding effect by allowing the children to pay off the mortgage faster. What’s good for the folks is they retain control over the money in their account and this offsetting is removed once the kids are on their way.
5. Co-owning with parents
This can work well when all parties are working – you, your partner, and Mum and Dad. In this situation, all incomes are to be taken into account for debt servicing. So the home loan is in all your names.
The risk with this, is, if any of you default on loan repayments, it will impact on all the co-borrowers’ credit ratings which could make for some awkward family dinners.
It’s always best to seek independent legal advice for this arrangement. Lawyers say co-owning calls for a Property Sharing Agreement which will outline the rights and responsibilities of each party and an exit route.
Other things parents can do to help you on your way
Some parents help incentivise saving:
- Matching what you are saving each month, which can be very motivating.
- Allowing you to live at their house rent free, while you save for a deposit.
In all cases, it is important to ask the tough questions up front.
Key questions for Mum and Dad before they take the next step
The last thing you want is to endanger your parents’ comfortable retirement with their warm-hearted gesture. So here are some questions for them:
- Can they afford to never see this money again?
- Will it compromise their retirement?
- Do they have enough of a buffer for their own retirement?
- Will they have to keep working for longer than planned if the loan is never repaid?
- What happens if the child’s relationship breaks down?
- What happens if the child loses their job and they can’t make the repayments any more?
- Would they feel comfortable evicting their child from the home and enforcing the sale?
- If, heaven forbid, something were to happen to the child, do they have enough life insurance in place to repay the debt so it's not left to the parents to deal with?
*We hope this article has provided some helpful information. It's based on our experience and is not intended as a complete guide. Of course, it doesn’t consider your individual needs or situation. If you're thinking about buying or selling a property, you should always get specific advice.
Other articles you might like