The ‘Bank of Mum and Dad’ has already lent $22.6 billion and is the fifth highest owner-occupier home lender in New Zealand, after the four main banks. If you’re looking for ways to help your children or grandchildren into their first home, here are the main options:
Gifting money freely
This method is typically used for smaller sums of money that don’t need to be repaid. To confirm this is not additional debt for the home loan applicant, a lender will require a formal statement or gifting letter from the giver. This will state that the gift is ‘non-interest bearing, no repayments are due and no subsequent charges or encumbrances will be loaded on the security property for this sum’. Before gifting money in this way it’s important to get independent taxation and legal advice, especially if you’re older and might want to apply for a rest home subsidy in the next six years.
Gifting with conditions
This is often used for larger sums or when a gift comes from a family trust. Your lawyer draws up a ‘deed of acknowledgement of debt’ that states any requirements or terms for repayment. A term like ‘funds repayable on sale of the property’ is often used to ensure the gifted money is repaid in full if a relationship your child is in breaks down. This term is normally acceptable to lenders as it doesn’t add to the borrower’s debt, at least until the home is sold and then the home loan would be repaid anyway. Catch-all terms like ‘repayable on demand’, which some lawyers might include to increase your protection, will usually mean the home loan provider treats the gift as existing debt. This can reduce the amount they’re willing to lend.
Providing a loan, not a gift
This refers to a formal loan with set repayments due over a period of time, whether you want to charge interest or not. The home loan provider will want to see a formal loan agreement that specifies the amount you’re lending and the repayment terms. They’ll treat the loan as a debt (liability). The repayments will be treated as regular expenses when calculating the borrower’s ability to service a loan. The loan amount can also affect how much the home loan provider is willing to lend.
Using equity in your own home
This method is often used by parents who don’t have cash available but really want to help their kids get on the property ladder. However, you need to have enough equity in your own home and an income to cover the repayments on a small additional home loan, if required. Sometimes known as an ‘80/20 or springboard loan’, it typically works like this:
- Your child borrows an 80% home loan secured by their own new home.
- They provide a 10% deposit, but avoid paying low-equity interest rates because the remaining 10% is borrowed in both of your names using your house as security.
- The 80% loan is usually structured as interest-only for five years.
- The 10% loan has a short term of 5 to 10 years with principal and interest repayments.
- Your liability is only for the 10% amount. Once that loan is fully repaid, your child continues with their 80% home loan in the usual way.
It’s important to get experienced financial advice before agreeing to help your kids buy a home. Every parent’s situation is different, and there will be taxation liabilities and future financial needs to consider. It also pays to get advice about potential impacts on your wider family, especially when you have more than one child. Talking things through to ensure financial assistance is seen as fair can save a great deal of stress and heartache in the future. For advice about helping your children to buy property, call your Apex adviser today.