How to keep a lid on Bank of Mum and Dad

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FAMILY:

How to keep a lid on theBank of Mum and Dad

If you are like me and have adult children in their mid to late twenties and in full-time employment, the subject of working towards owning their quarter acre of paradise will undoubtedly have come up in the conversation.

For many families today, the children increasingly have crippling student debt on entering the workforce, even if they have had part-time jobs throughout their time at University or Technical Institute. If they then choose to do an OE, then any time over six months out of New Zealand means that student loan debt is no longer interest-free and steadily rises even if they or their family have the means to pay at least the minimum loan repayment levels set by the Inland Revenue. The result is a more substantial debt to repay if they do choose to return to New Zealand. Add to this mix the highly inflated housing market across New Zealand has seen many first home buyers shut out of the housing market.

In New Zealand, we see up to 9 out of 10 first home buyers rely on some form of help from the Bank of Mum and Dad, making it New Zealand’s 6th largest lender.

With two of our offspring having come back from their OE and now at an age where they and their friends are now thinking about getting on the property ladder, I was chatting to Nigel about our various options on helping them and the possible

traps we needed to be aware of. As this is increasinglya conversation that is coming up with many of ourclients here are a few of the tips discussed and trapsto avoid as stumping up with a large deposit may notbe in any one’s best interest and may not encouragea bank to lend.

1. Good Credit History?

It’s all about risk and banks need to see that theultimate borrower can save and manage theirmoney. If you hand over the entire deposit, youroffspring may not be viewed as a good credit risk. Sofirstly, have a conversation around ensuring that yourchildren have a history of saving and paying backcredit on their cards. The aim is to have them cleanup the credit and rein in their smashed avocado andoverseas holiday lifestyle.

2. Avoid going in as a Guarantor as it is risky.

It’s a simple option, and many parents elect toguarantee their kids first home loan with the banksecuring the loan against the parent’s home. The

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downside is that unless you have fixed the amount guaranteed, the bank can lend more and you as the guarantor are unaware. If your offspring defaults, and yes this does happen, then there is a distinct possibility that you could lose your own home.

An option to reduce the risk would be to ensure the guarantee is limited to the minimum amount required. Alternatively, joint lend a portion of the loan, which can allow you to control how much exposure you can afford.

3. Co-Buy

Another possibility is for your offspring to join forces with their siblings and or you and buy a house together. Here your kids do not have to stump up with the entire cost of the house and your co-purchasers share in any Capital Gain. With

the historically low-interest rates being offered on deposits at present this works as a potential investment opportunity for you if you have spare capital. In this scenario, we would recommend establishing a property sharing agreement before purchasing to ensure that all parties understand what the agreement entails.

Some points to note:

i) With the Brightline test sitting at five years if the house is sold within this period, some of the copurchasers could be drawn under the test and need to pay tax on any profit made on their share of the Capital Gain. For first time purchasers, this is not the case as if they live in the house then they are exempt. This applies from day one. Another advantage here is it provides matrimonial protection for your ownership share – the in-laws cannot get their hands on it.

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ii) There are possible downsides for the kids if they do not intend to live in the property as they will not qualify for a Kiwisaver first home withdrawal or the Home Start Grant. Further, they will then be caught under the 5-year Brightline test as well, as well as lower loan to value ratios (LVR) as it is now an investment, so the banks will only allow 60% debt, not 80%.

iii) If instead, you have extended your mortgage to finance the deposit or buy into a property with the children you do need to seek legal advice as to how you should handle this money as it can quickly turn to quicksand if the child’s relationship splits or the house becomes subject to a mortgagee sale.

iv) Lending rules (lower deposit ratios) can differ if building a new home; therefore, another option would be to jointly buy a section and lend to build.

4. Rentals

Another option open would be for you to buy a rental either personally or under the family trust and then rent this to your offspring and some flatmates.

When your child is in a position financially, they could buy the property. This also presents opportunities to gift all or part of the equity to the child if you can as an early inheritance at a time when the child is more in need of financial assistance.

5. The Red Flag – Divorce

The best scenario would be to loan the amount, but most banks expect this lump sum to be gifted. If this is the case, then we would suggest that a Relationship Property Agreement (RPA) is set up between your child and their partner for that specific amount. The RPA only needs to deal with the amount gifted to the child and records it as that child’s separate property; all other assets do not have to be covered by the RPA. The moral of the story is not to gift until all parties sign the RPA.

Family politics can rear its head as loans and gifts can create tension in a family, and there is a high chance that the loan is not repaid as the children view this as their entitlement and an early inheritance. Having an open conversation with all the family members present can help educate all the family and ensure everyone is reading off the same songbook.

Another option, if you are in a position to assist financially assist is rather than helping with the deposit you could offer to pay for some or all of the incidentals that are often overlooked with buying a house such as conveyancing, moving costs, home and contents insurance, furniture or a building report.

Ultimately you must be comfortable with what you decide, and it is essential that you do not compromise your retirement and security. You don’t want to create division amongst your children, and you definitely do not want to create a sense of entitlement by stepping in too soon. Sometimes its better for all parties for your children to save up for a few years before buying their first home.

If you are in a financially secure position (don’t need this for your retirement) then making a cash gift to push the deposit up to or over the 20% required can mean the banks offer the optimum mortgage rates and conditions. However, this gift and its intent need protecting from any possible future relationship breakdown.

Sally Herbertwww.covisory.comsally@covisory.com

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