It’s natural for parents who can afford it to want to help their children get a foot on the property ladder. With house prices still above pre-Covid levels and inflation biting, it can be difficult for first home buyers to save a deposit.
The majority of parent-supported purchases go well. The parents give their children a leg-up into home ownership and the younger generation becomes independent and gets on with paying down the mortgage. But it can be a minefield. The downsides range from nasty tussles over who owns what if the children are in relationships that break down to banks seizing the parents’ home if the children stop paying the mortgage.
1. Gifting the deposit
Gareth Veale, mortgage adviser at EasyStreet, says the most common way parents can help is by gifting their child a portion of or the entire deposit. If the mortgage is being sourced through a bank, then the first-home buyer usually needs at least 5% of genuine savings, which will be checked before approval is given. Banks view the ability to save a deposit as a sign that the borrower will be financially responsible to make regular mortgage repayments.
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“If they’re borrowing from a bank with a 10% deposit, the rule of thumb is 5% genuine savings. If you have a 20% deposit, generally the banks don’t require any part of [the deposit] to be genuine savings.”
If borrowing using the government’s First Home Loan scheme, then the parent/s can gift the entire 5% deposit, says Veale.
2. Lending
Some parents prefer to lend the deposit rather than gift it, for a variety of reasons. They may need the money back for their own retirement or they fear the consequences of a relationship split for their son or daughter.
The way around the issues with relationship breakdown, says Veale, is to get an “acknowledgment of debt” letter. “This acknowledgement letter in the background can ensure that it's taken off first before any equity is divvied up between the two parties [if they split]. Most banks will accept that as similar to a gift.”
Veale has seen clients lose their deposit when they didn’t take this advice. “I had a situation where the parents gifted their daughter $100,000 towards the purchase and she put $40,000 of her KiwiSaver in. The guy brought nothing in, only [his income].” A year later they split and he took 50% of the $140,000 deposit and the capital gain.
“I gave them that advice [to get an acknowledgement of debt letter], but they didn’t take it. People say, ‘Oh no, we can trust him, blah, blah, blah’. People learn through trial and error.”
3. Meet them half way
Parents need to be wary of lending or gifting money to children who haven’t learned to save. Rescuing adult children can sometimes backfire.
Easy Street mortgage adviser Gareth Veale: "People say, ‘Oh no, we can trust him, blah, blah, blah’. People learn through trial and error.” Photo / Supplied
Financial adviser Lisa Dudson often suggests to her clients that if they want to help their children into a home, don’t give the entire deposit on a platter. “For example, match their savings dollar for dollar. But make sure there is clarity around whether it’s a gift versus a loan. Make it really clear,” she says.
Always get legal advice and have agreements drafted by lawyers. “That is really important.”
4. Co-buying the home
Some parents like to co-buy the home to ensure that they share in the capital gains. This is possible even if the younger generation is using KiwiSaver to buy. However, the parents need to seek tax and legal advice.
One issue is the Government’s bright-line tax on investment properties. If parents transfer their part share of the home to their children at a later date they could be liable for the bright-line tax if the property has risen in value in the meantime. The bright-line tax period is 10 years on existing homes, and five years on new-builds, which might tie parents in for a considerable period of time, and stop the children upgrading their home during that time.
5. Going guarantor
Parents who don’t have cash to gift sometimes choose to go guarantor on the children’s home loans.
A parent signing up as guarantor allows buyers without sufficient deposit to borrow. However, it makes the parents responsible for repaying the loan or a portion of the loan if the children default on payments.
While parents often believe going guarantor is just a piece of paper, the wording of guarantees usually allows the bank to force the sale of the parents’ home to get its money back. That has happened, but is so rare that Veale has never seen it personally as a mortgage adviser or banker prior to that.
If the parents go guarantor directly through the bank the agreement may well be unlimited, guaranteeing all future borrowing by their adult child and partner, including credit cards and business loans with that same bank.
For many Kiwis, saving for a deposit is the biggest housing market hurdle. Photo / Ted Baghurst
For that reason it’s a really good idea to use a mortgage adviser when going guarantor. The adviser should be able to ensure the guarantee is not open-ended. “It doesn't have to be unlimited,” says Veale. It can be limited to the shortfall in the adult child’s deposit. Banks don’t always do this unless asked.
One of the issues with going guarantor is that the parents need to go through the equivalent of a full loan application under the Credit Contracts and Consumer Finance Act [CCCFA], says Veale. That is often an issue for anyone who is retired, and doesn’t have an income, because typically they won’t pass muster under the CCCFA. “Just because you've got equity in the house doesn't mean that you'd be able to guarantee the children,” says Veale.
An alternative to going guarantor is for the parents to borrow the deposit against their own home, then lend or gift it to the children. That way their own home isn’t at risk directly from the younger generation’s financial behaviour, although as soon as the home has risen in value sufficiently so that the younger generation has sufficient equity to hold the home in their own right, they need to have the parents' names removed from the mortgage.
6. Giving them advice can be just as helpful
Even parents who have no money to lend or house to borrow against can help by giving advice, and bringing their children up to be financially prudent. That starts from a very young age by teaching them the power of saving.
If the children are saving a percentage of their income regularly from a young age, the good habits will help them budget for home ownership when the time arises without having to unlearn bad habits.
Then parents should be encouraging their children to join KiwiSaver and start contributing a portion of birthday and Christmas money and part-time income. Under current rules they need to have five years of savings in KiwiSaver to qualify for the full First Home Grant.
Parents do need to beware of entitled children who expect assistance. This can prove a disaster. Too often, says Dudson, the younger generation doesn’t understand what it took for their parents to get into a position to help them financially.
Nor may they understand that the parents need their money to afford retirement. Subsidising their children’s home ownership could jeopardise their own retirement.
