The Bank of Mum and Dad is the only option for some first home buyers
The Bank of Mum and Dad is the only bank in town for some first home buyers, writes Melanie Carroll.
It takes a village to raise a first home buyer – house prices mean you can’t really do it without a partner, and many people can’t do it without their parents’ help either.
Buying your first house is a major milestone on the journey to becoming an adult, but is it complicated if you’re financially dependent on Mum and Dad?
Financial adviser Martin Hawes says he hasn’t come across that, but there are other pitfalls to avoid.
‘‘The problems I have seen are first of all fairness within a family, so one [sibling] is getting help from Mum and Dad, whereas one didn’t need it five years ago, and that may need to be redressed.’’
There’s also confusion sometimes as to whether the Bank of Mum and Dad will own part of the property, or is making a loan.
‘‘This is often surrounded by a younger couple settling down, the relationship is seen as much more stable, and then from the young couple’s point of view they get to own their own property and that’s very exciting. I think in all of that excitement, some of the details get missed.’’
He says that whatever the arrangement it’s important to get it properly documented, so a loan agreement is drawn up, or the parents appear on the title with the percentage of the property they own.
There needs to be a way out for the couple, for example that the parents will allow their equity to be bought out either at market value, or the amount they originally put in.
There’s also the potential for a partner whose parents aren’t helping out to either walk away with part of the other parents’ money if the relationship fails, or conversely find they’ve got negative equity.
Kiwibank hasn’t seen an increase in use of the Bank of Mum and Dad, but it’s already a well-used path to home ownership, says Chris Greig, Kiwibank head of borrowing and savings.
‘‘Anecdotally I’d say at least half of our first home buyer applications in major centres, particularly in Auckland and Wellington, are going to have some form of help from their parents.’’
There are five key options when it comes to the Bank of Mum and Dad, says Greig – gifting an amount, lending an amount, becoming a guarantor, becoming a co-owner, and nominating an account for an offset mortgage.
Often discussed is gifting, but the reality is that not many
‘‘The problems I have seen are first of all fairness within a family, so one [sibling] is getting help from Mum and Dad, whereas one didn’t need it five years ago, and that may need to be redressed.’’
Martin Hawes Financial adviser
people can afford to be that generous.
Lending, being a guarantor, and co-ownership all have some complexity, and the parties need to be very clear about the terms of the deal.
For example, under coownership, there are issues such as how the equity will be divided once the property is sold, or whether any rent will be paid.
Through an offset account, parents still have control over their funds but they help reduce the mortgage repayments because they’re offsetting the interest. However, offset mortgages are at floating rates, not fixed, and are likely to be more expensive than current two- and five-year home loan deals.
But there’s no concern about relationship breakdowns, and parents aren’t on the hook for the loan.
According to MoneyHub, offset mortgages are offered by BNZ, Westpac, and Kiwibank.
SBS Bank has seen an increase in family assistance for deposits, and other funding arrangements, as the number of first home buyers rises.
Low interest rates are helping first home buyers into the market, but they also make the decision easier for staff at the Bank of Mum and Dad, says Mark McLean, SBS member experience general manager.
‘‘Yes their children can get on the property ladder, but the flip side is they’re not losing that much yield or return, given that a term deposit in the bank is so low at the moment,’’ says McLean.
Dr Pushpa Wood, director of Massey University’s financial education and research centre, says many parents who are financially able to would want to help their children, but sounds a note of caution.
‘‘There are some parents who actually borrow money to help their children because I guess they feel morally obliged, they feel family-wise obliged, all sorts of obligations, and of course your culture plays an important role in that.
‘‘Especially in Asian culture, if you’re living in a house and your child doesn’t have a house and they’re struggling, then you would automatically want to help out.
‘‘The complication is that parents would prefer the children to live in the same house, to cut down the cost, and children want their own independence.’’
Parents sometimes forget to protect their own interests in the rush to help their child, Wood says.
‘‘I’ve seen a few heartbreaking cases where parents help their children and end up on the street through no fault of their own.
‘‘If parents are helping, it can become complicated if their child is in a relationship, that’s where the biggest risk comes in if you don’t put some safety nets in place.’’
Parents need to ask themselves what is going to be put at risk if something goes wrong, and what they can put in place to safeguard that.
For Wood, the key thing is that New Zealand as a country needs to start thinking beyond ownership as a way to put a roof over peoples’ heads.
‘‘Bring the nanny flats on – that way the child builds the nanny flat and the parents hand over the house and they can live in the nanny flat, I’d love to do that. Think outside the box.’’
‘‘I’ve seen a few heartbreaking cases where parents help their children and end up on the street through no fault of their own.’’
Dr Pushpa Wood Director of Massey University’s financial education and research centre