Bank of Mum and Dad

Kiwi parents have invested more than $22 billion dollars to help their kids into their first homes. And about 70% of first-home applicants have some sort of help from their parents. So it’s not uncommon – and three out of five parents don’t even want the money back!

Getting on the property ladder for the first time is all about accelerating your ‘averageness’. Let us explain… In Auckland, the average property is about a million bucks. If you’ve got a ten per cent deposit, and you borrow the rest, you must have an above-average income to facilitate that loan. But, if you can get help from the bank of Mum and Dad, then you can buy better than average, and you’ll move up the property ladder quicker. Here are three common scenarios with the bank of MAD.

1. Mum and Dad Provide a guarantee

Parents will secure the loan against their own property, essentially, they’re allowing their children to use the equity in their property (see here for an explanation of equity). If Mum and Dad are the guarantors, and the children can’t, don’t or won’t pay, then the lender will be well within their rights to ask Mum and Dad to make the payment. And if that continues for too long, then things, including the properties, start being sold. We’re not going to lie, it’s a big fat risk.

 

2. Mum and Dad give a gift of money

It’s as simple as making a transfer of money from their account to yours, it could be a gift or an early inheritance. This is a gift without the expectation of being repaid and it has no strings. But, if you are gifting the money to your child, and then they buy a property with their partner, you are gifting it to both, hence, option three would be best if you are happy to give it away.

 

3. Mum and Dad provide a loan

It is a loan that needs to be repaid, but it doesn’t need to include interest or a timeframe. This way, if the relationship your child is in doesn’t last, you have recourse to get the money returned.

There are also options of co-ownership or letting them crash at yours while they save up for their deposit or utilising one of the options with another relative. But whichever option you choose, one thing we recommend you spend more time on is legal documentation. No one plans for bad stuff to happen, but when you are organised (just like insurance), it helps a lot with any pain or frustration at the time.

It’s not necessarily about finding the right lender, it’s also about the right details for the journey of both parent and child. Timeframes, interest, deposits, agreements – don’t get lost in the paperwork, let Hastie Mortgages ask the right questions to get the right solution.

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Got questions? No worries, there aren’t many we haven’t heard before – get in touch and ask away.