Author: Martin Kovacs
Could the Bank of Mum and Dad be your key to home ownership? Canstar explores what’s involved.
Over the past two years, house prices have soared. And although the housing market has now started to cool, higher interest rates and the rising cost of living are threatening to quash the dreams of home ownership for prospective first home buyers.
Saving for a deposit remains a huge obstacle for many first home buyers (FHBs). A 20% deposit for the average house in New Zealand sits well over $150,000, rising to over $200,000 in Auckland. But if you’ve got parents willing and able to help you financially, saving for a deposit is just one of the obstacles the Bank of Mum and Dad can help you overcome.
But before you seek a financial leg-up from your olds, it’s important to weigh up the potential positives and negatives. In this guide, we look at the pros and cons of family assistance, and the different forms it can take. We also cover different ways to avoid potential pitfalls.
Seeking out the Bank of Mum and Dad
If you’re considering asking your parents for financial assistance, it’s important to have a practical understanding of the property market. You need to be realistic about your property goals, and the financial commitment that’s required to achieve them.
Crunch the numbers and get a dollar value of the assistance required. Also, work out what form of assistance you need. The most common forms of parental assistance are:
- Gift – money given, or a property purchased, without the expectation of repayment. There may, however, be other conditions attached to this type of arrangement, such as having a say in any future financial decisions related to the property
- Loan – could be provided as an interest-free loan, or with the condition of interest attached. Depending on what the loan is for (such as a deposit or property purchase), there may be leeway to tailor repayment conditions according to individual circumstances
- Acting as guarantor – parents using their own property as security to obtain a mortgage, helping to make up a percentage of the initial deposit required
- Co-ownership – buying a property with their child, with both parents and the child owning a percentage of the property. This type of arrangement needs to include conditions on how costs are split
Financial assistance can also take more indirect forms. For example, parents offering their adult child rent-free accommodation while they save for a deposit.
Family assistance pros and cons
What is suitable for one family may not be the right approach for another. So, it’s important to consider all the factors (financial and personal) that have a bearing on whether parental assistance is the best approach.
Family assistance pros:
- Fast and fewer hurdles – rather than spending years saving for a deposit, parental assistance can facilitate quick entry into the property market
- Lower/no interest rates – parents can provide a no-interest or low-interest loan
- Flexible repayment options – parents can offer more flexibility than a bank when it comes to repaying a loan
- Financial benefits – a property in which parents have a stake offers them, too, an investment opportunity. This can deliver financial benefits for the wider family further down the track
Family assistance cons:
- The answer is “no” – it’s worthwhile considering that a loan request may place parents in an uncomfortable situation. They may be unwilling to help
- Financial strain – parents may feel obliged to help, but then find it jeopardises their own financial security
- Family tension – are personal issues likely to arise? For instance, will there be family resentment if financial support is provided to some family members but not others?
- Change in circumstances – what happens if there is a personal or financial change in circumstances (such as a job loss or a relationship break-up)? Parents may find themselves out of pocket, while those who act as guarantors may find their own property at risk
Plan ahead and consider short- and long-term outcomes
There are a number of steps that families can take to address concerns related to providing financial assistance. It always pays to plan ahead and consider the potential short- and long-term outcomes.
In determining whether or not to provide assistance, it’s important to recognise that personal and financial circumstances can change considerably over time.
Some steps that can be taken include:
- Be upfront and clear – from the beginning it’s important to clearly establish the nature of the assistance. Is it a gift or loan? Are there any conditions attached? Address and talk through any concerns
- Be realistic – about the potential financial stress that may be caused. Err on the side of caution in making projections about repayments
- Be open-minded – there are various ways parents can help. It’s important to consider the pros and cons of each
- Plan for the unexpected – what will happen if repayments can’t be met, or if circumstances change? Have plans in place for different events, including worst-case outcomes, along with an exit strategy
- Seek out professional advice – consult with a financial adviser and lawyer. Run through the different options available and get any agreements legally documented
What the banks offer
If you are fortunate enough to be able to get financial help from the Bank of Mum and Dad, a couple of lenders offer mortgage products specifically designed for the purpose:
What is Westpac’s Family Springboard?
If you’re finding it hard to save for a deposit, Westpac’s Family Springboard loan comes with the choice of two different structures to help you get into a first home sooner.
The two different loan structures mean you can avoid having to pay higher interest rates in the form of low equity premiums, and can remove the need for a substantial deposit.
However, each comes with different levels of risk and loan disclosure for family members, so you will need to decide between you which is best for your personal circumstances:
Family Springboard: Co-borrower structure
You take out a mortgage in your own name for up to 80% of the value of the property, while you co-borrow the additional 20% with a family member in a second shared loan.
You make the repayments on both loans, but your family member is responsible for the repayments on the smaller loan should you default.
Family Springboard: Guarantor structure
The guarantor structure involves just one home loan, covering 100% of the property you’re buying, less any deposit you’ve saved.
A family member signs as a guarantor of 20% of the total loan, meaning they’re responsible for meeting any repayments on that part of the loan should you default.
→ Related article: Low Deposit Home Buyers Beware of the Low Equity Premium
What is Kiwibank’s Co-own?
Kiwibank’s Co-own offers a streamlined approach to working through a joint mortgage application processes. It helps you join together with family and/or friends, but you’ll need to do most of the hard-lifting yourself:
- You will still need to save at least a 20% deposit …
- … plus organise a legally binding property sharing agreement. This part is separate from Kiwibank and Co-own, but it’s an essential step before you co-buy. Working with a lawyer, you need to outline the co-owners’ rights and obligations in relation to the property. This includes what happens if someone wants to sell early, or can’t meet repayments, etc.
Regardless of which lender you use, or which family member helps you make your property purchase, having clear, legal agreements between all parties from the outset will help avoid any dramas later down the line.
Whether or not your parents are able to help you out financially, if you’re in the market for a first home, you need to talk to the experts: lawyers, real estate agents and mortgage lenders.
And when it comes to finding the best mortgages, let Canstar be your guide. Not only can you compare mortgage rates for free on our site, we publish expert research into the best lenders in the market. To read more about our latest First Home Buyers Award, just click on the big button below.
About the author of this page
This report was written by Canstar author Martin Kovacs. Martin is a freelance writer with experience covering the business, consumer technology and utilities sectors. Martin has written about a wide range of topics across both print and digital publications, including the manner in which industry continues to adapt and evolve amid the rollout of new technologies
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