Author: Martin Kovacs
Since the beginning of the year, mortgage rates have plummeted. Currently the lowest rate on Canstar’s comparison tables is a record low of 2.45% p.a. from HSBC. However, it comes with a big catch – you need a 20% deposit. Enter the Bank of Mum and Dad!
Yes, borrowing money is cheaper than ever. But thanks to low returns on savings and KiwiSaver’s COVID-19 slump, saving for a deposit remains a huge obstacle for many first home buyers (FHBs).
It’s especially tough given constant house price inflation. However, if you’ve 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 challenging market for FHBs, the pros and cons of family assistance, and the different forms it can take. We also cover the different ways to avoid potential pitfalls.
Despite COVID-19 house prices hold firm
The property market is undoubtedly a daunting prospect for FHBs. Despite COVID-19, the latest figures from the Real Estate Institute of New Zealand show that in June:
- The national median house price was $639,000, up 9.2% from $585,000 year-on-year.
- Excluding Auckland, the national median house price was $540,000, up 11.3% from $485,000 year-on-year.
- In Auckland, the median house price was $928,000, up 9.2% from $928,000 year-on-year.
Notably, the Reserve Bank of New Zealand has removed mortgage loan-to-value ratio restrictions in response to the economic downturn caused by COVID-19. However, challenges still remain for FHBs. Even a 10% deposit for each of the median house prices listed above requires a considerable sum: nearly $100,000 in Auckland and over $50,000 elsewhere.
In these circumstances, it’s understandable that many FHBs are exploring all of their options, and that the Bank of Mum and Dad is becoming a common port of call.
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.
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 getting funds together, 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.
Regardless of if 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 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 First Home Buyers Award 2020, just click on the big button below.
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