Pros and cons of borrowing from the Bank of Mum and Dad

For first home buyers, getting help from parents is more common than you might think.

Mortgage brokers report around 70 per cent of first home applicants have some sort of help from what is colloquially known as the Bank of Mum and Dad (or BoMaD). Banks report a slightly lower percentage; anecdotally around 60 per cent.

For most people, the help comes with their deposit. Banks require that mortgage applicants have “genuine savings” of at least 5 per cent of the purchase price, but beyond that, parents can help applicants as much as they like. Assistance with income for the mortgage is far less common, mainly due to the complicated way that banks calculate the ability to pay for a mortgage.

There are generally three ways that applicants receive deposit assistance. The first is a gift that is not required to be repaid; a form of early inheritance. The second is a long term loan that isn’t required to be paid until the property is sold in the future. Usually these don’t have an interest component but can sometimes require a share of any future capital growth.

The third is a loan that requires regular payments to be made. This most often happens if the parents need to raise a mortgage on their own home to help their children. Repayments are made to cover these mortgage payments but they do reduce the applicant’s income.

There was some speculation that the Covid-19 lockdown would increase the number of applications that involved parents. However this doesn’t seem to have eventuated for two reasons. The Reserve Bank’s removal of the LVR restrictions should soon make it easier to get a mortgage with a low deposit.

And secondly, the main difficulty that applicants are having at the moment is uncertainty around income, and assistance from parents doesn’t often help this situation. If you have temporarily lost your job, simply adding your parents - who are likely reasonably close to retirement - to the mortgage doesn’t often have a significant impact to the overall application.

One thing that first home buyers should spend more time on is the legal documentation around the gifting process. Banks only require a very brief declaration as to whether the funds are a gift or a loan. But the money that is provided as a deposit can get caught up in matrimonial assets if the right documentation is completed. First home buyers and their parents need to make sure the terms of the gift or loan are clearly set out in the very beginning. No one likes to plan for a divorce but it is better to have the documentation there in case the worst should happen.

The banks don’t mind home buyers receiving an early-inheritance type gift or a long term loan, as long as the applicants have their genuine savings and as we’ve seen, having some sort of help is very common, particularly in Auckland. I suggest talking to your lawyer about the gift at around the same time as you apply for pre-approval. The documents can be drawn up and finalised at the same time as the settlement documents for your new home.

- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.