COMMENT: The affordability challenges facing first home buyers have created one of the great dilemmas for parents with children in their 20s. Should they step in and become the bank of mum and dad?
The fact that parents would need to support their children into their first home is an indictment of the property market right now and immediately raises questions around equality as not every parent is in a position to fund their child into a home.
For those that are in a position to help their children, the big question is how much help do you give and in what form.
To answer they should start asking, “What is fair?” To be able to help in a market where the nationwide median sale price for first home buyers is currently $700,000 (and $895,000 in Auckland) is no small thing. Many parents will have worked hard to get to their current position and a big investment may require that they continue working hard towards the later part of their working career.
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Some may also be paying off their own mortgage and juggling savings for their retirement, or have plans to enjoy their life, so getting the mix right is crucial.
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But let’s say, as a parent, you’ve discussed all the above and you’ve reached the conclusion that you will for your child’s sake become the bank of mum and dad. The next big question facing you is what form of help should you give? Is providing money for the deposit the best option for you and your child? Or should you underwrite the debt? Other options include keeping a stake in the property and buying the property outright and renting it out to your child. Let’s work through some of them.
Providing a deposit is nice and clean - here you go and no further obligations – but beware that banks will still need your child to show they can service a mortgage and have a good savings history.
Underwriting the debt might allow your child to buy into a nicer house but also possibly one they can’t afford. You may find yourself in the situation where you are frantically checking every month that the mortgage has been paid.
Keeping a stake in the property adds a new level of complexity and cost as you have probably contributed to the deposit, underwritten the loan, and committed to monthly mortgage payments. You’ll be unlikely to be able to sell the property unless you have an upfront agreement and it’s likely you’ll only sell your stake at some future point to your child, possibly below market value - so limited capital gains.
If you have decided to buy the property and rent it out to your child, then congratulations on becoming a property investor, although you’ll struggle to put the rent up or sell the property, for the reasons outlined above. And financial costs related to this property investment could be higher than you expected.
So what does that really cost you if you’re 50, have 15 years until retirement, and could have invested the money with a 5% annual return?
Obviously, you will need to change the inputs to reflect your circumstances but the theme will be the same. Instead of investing $50,000 in a deposit for your child’s property, putting the same amount in a multi-asset fund with an assumed 5% annual return would end up delivering you $106,000 in 15 years’ time. Similarly, $500 per month in the same investment would yield $134,000 after 15 years.
Helping your children into property is expensive and could affect the quality of your later life. What’s fair and how much are you prepared to contribute?
- Glenn Dunn-Parrant has been investing in property for 30 years and works for NZME.
