Mortgage brokers do a brisk trade in organising home loans for children who have sought help from the Bank of Mum and Dad, says mortgage broker Geoff Bawden of Bawden Consulting.
The noticeable change over the past decade, says Bawden, is the sheer size of the assistance from parents. Up until a decade ago it wasn’t uncommon for parents to help out their children to the tune of $20,000 to $30,000 for a deposit, says Bawden. These days it’s more like $120,000 to $130,000.
Bob Hargreaves, emeritus professor in property studies at Massey University’s School of Economics and Finance, says parents could be using their bank deposits to help the next generation into homes. As a nation, those deposits add up to more than $150 billion.
“Alternatively parents (who can afford to) could use cash from deposits to share in the ownership when the children purchased a first house and when the parents passed on ownership would be entirely with their children,” says Hargreaves.
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Other ways to help, says Bawden, include:
- Go guarantor. No money changes hands if the parents guarantee the mortgage. Without good legal advice and/or a mortgage broker working for them parents put their own home at risk if the children default.
- Borrow the deposit against their own home and lend or gift it to the children. That way, says Bawden, they’re not putting their own home on the line if the children fall into arrears. The downside, however, is that the children may not see repayments to mum and dad being as important as their other bills.
- Co-buy with the child. A parent buys a portion of the home and owns that until the child buys the older generation out. The child/partner may not qualify for the KiwiSaver Home Start grant, however, because the parents aren’t first home buyers.
The actual data that parents are helping their children more is thin on the ground, says ASB economist Nick Tuffley. Around one per cent of new home loans are guarantor assisted loans, he says.
So the idea that parents are doing this en-masse isn’t borne out by the data. The ASB does see anecdotal evidence that parents are helping their children informally with deposits.
The noticeable change over the past decade since prices galloped away from income in Auckland and a few other locations such as Queenstown, is that banks are looking at borrowers through a different lens, says Tuffley.
In the past the bank might be worried that a first home buyer had been lent or given the deposit by parents and didn’t have the financial behaviour to make repayments. High LVRs (loan-to-value ratios) have resulted in a different picture, says Tuffley.
“The conversation has shifted from ‘you only have a 10 to 15 per cent deposit and we are (or are not) happy with you as a credit risk’ to ‘we like you but we are not able to lend’. It puts a very different lens on it.”
Tuffley says the rising market has changed the conversation within families.
“In previous booms you would have had mum and dad saying ‘we are doing very well and are quite happy’. Now they are saying: ‘it might be good for me but I am realising my children can’t access the housing market unless we give them some support’.”
This change in narrative may be encouraging more parents to offer support to their offspring.
Adult children like the Bank of Mum and Dad because they have to jump through fewer hoops to get their money and the repayment terms may be easier. It can come with moral and practical questions such as:
- Can you do it for all of your children?
- Is it better to pay off their debt or lend to buy a home or a business?
- Are you compounding problems with entitled children who think the money is their birth right?
- Should you give gifts or make loans? The latter protects the child from losing half of the money to a partner should they split.
Lending to children can create enormous rifts within the family. What's viewed as fair in one family or culture may not be in another.
All of that said, a loan structured correctly with the bank doesn't cost the parents anything and takes the children out of that rental cycle where they can't save any money
Finally, any parent looking to bankroll their children into a house with money or guarantees should ask themselves: Is my child and his/her partner financially responsible? And if my child lost the money, what would the affect be on me?
