Helping your kids buy their first home

Up to 60 to 70 percent of NZ first home buyers will receive a loan or contribution from parents or grandparents, according to NZ Herald.

There’s now a good chance your children won’t be able to buy their first home without your financial assistance - here's what you need to know to make sure the help doesn't make family relationships more fraught.

‍By Nigel Bowen

It’s not news that New Zealand property, especially in major cities, is absurdly expensive. It’s also no secret – though all parties often feel awkward talking about it – that many parents now help their children purchase property, especially their first property.

Parental assistance is now close to the norm

Across New Zealand, the median price of a residential dwelling is $770,000, but for expensive cities like Auckland, you’re looking at an eye-watering $1,048,000 for the median property.

It seems like the only way many first-home buyers can now hope to break into the housing market is with substantial financial help from their parents or grandparents, as they become even more crushed by interest rates, rising prices and borrowing limits.
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According to MoneyHub, it takes the average Kiwi 5-10 years to save for a home deposit, which is a long time to save, especially when the goal-posts keep moving with property prices and interest rates going up.

As many Kiwis do, you may have strong opinions about the state of the housing market and some clever ideas about it could be reformed. That’s all well and good, but when your adult son or daughter says prices are only going in one direction and that if they don’t make a move soon, they may never be able to get a toehold on the property ladder, you’ll have to make some critical decisions fast.

Should you help your adult child buy their first home, financially and emotionally?

We all instinctively understand that adding a financial dimension to a personal relationship almost always changes it. That’s why you’d think carefully about giving even a close friend a loan or a job, or going into business with them.

Things are somewhat different with your flesh-and-blood, whom you’ve already spent many years subsidising. But things won’t necessarily be that different, particularly once other parties are added to the mix.

There’s no way to guarantee your family relationships won’t be negatively impacted after issuing a loan from the Bank of Mum and Dad. But you can mitigate the risks by ensuring everybody involved –most importantly, the individual or couple stumping up the cash – enters the arrangement with their eyes wide open.

On that point, the first question to ask yourself is whether you’re in a secure enough financial position to assist. Because there’s always an unavoidable risk that a loan won’t be repaid. Even if the lender is 100 percent committed to discharging their debt and you trust them with your life, they could still lose their business or their job, suffer a severe illness, or even die.

If you’re not able to give money to others, then don’t. The same applies to going guarantor. If you’re tempted, especially after being reassured it won’t cost you anything, remind yourself you’ll be legally responsible for repaying the loan if the ‘primary borrower’ doesn’t.

Uncomfortable conversations now or heated ones later?

Let’s assume you’ve paid off your own home, fattened up your super balance, and are now in a position to “help out the kids”. The good news is that’s a promising place to start from; the bad news is that there’s still scope for misunderstandings, grievances and ongoing bad blood.

At a bare minimum, here are two core issues that all parties should discuss forthrightly before any money changes hands.
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Is this a loan or a gift?

Your adult child will be grateful for any help to buy a home, but you need to be aware of the pitfalls.

There are pros and cons to both approaches. The advantage and disadvantage of a gift is its simplicity. You give your child money, they buy a home, end of story.

Aside from the pain of handing over a wad of money you’ll never see again, the downside of a gift is that you have little control over what happens next.

How will you feel if your child immediately decides to sell the home you’ve helped them buy and uses the proceeds to invest in Bitcoin? More realistically, what happens if your child’s relationship breaks down and their ex-partner demands half of a property they’ve made little or no contribution to purchasing?

If the financial assistance is provided as a loan rather than a gift, more time, effort and paperwork will likely be involved. But it should benefit your child in a worst-case scenario (given that the loan will limit how much of the home the ex-partner can claim).  

Apart from that, expect all the standard rules to apply. For instance, if you go 50-50 on a property purchase with a child and later sell the property for a profit, you may have to factor in The Bright-Line Property Rule for your half of the profits.

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What can your other children expect?

There is a good chance the child you’re giving money to has at least one brother or sister. Human nature being what it is, it’s unlikely the sibling(s) will feel only uncomplicated joy as they witness you making someone else’s home-owning dream a reality. Especially if they already have a chip on their shoulder about parental favouritism.

You’ll have to be the one who acts like a grown-up in this situation. (You should have had plenty of experience by now). That means you’ll need to make the final call on who gets what and perhaps also about which children are presently wise enough to make sensible use of your money and which aren’t.

But in much the same way you used to reassure your children they’d both get equal time riding in the front car seat, you may find it advisable to reassure the sibling(s) watching enviously from the sidelines that they can expect roughly similar largesse.

Just as soon as the time is right.

This article reflects the views and experience of the author and not necessarily the views of Citro. It contains general information only and is not intended to influence readers’ decisions about any financial products or investments.  Readers’ personal circumstances have not been taken into account and they  should always seek their own professional financial and taxation advice that takes into account their personal circumstances before making any financial decisions.