Let’s talk about Family Loans and Gifting money as a way of putting together a deposit to buy a house.
In many cultures the sharing of a home between generations is common. While that is not so common here in Aotearoa New Zealand, parents helping their children to buy a house is a familiar story. The Bank of Mum and Dad is known as one of the largest banks in NZ!
Many parents assist their children into their first home. Here are the 5 most common ways that parents help their children to buy a house:
1. By providing rent free accommodation while the children live at home to allow the children to save for the deposit (great for natural savers).
2. By charging the children a lower level of board or rent and putting that money aside to give back to the children to use towards the deposit (great for children who have a natural tendency to spend rather than save).
3. By providing a low interest or interest free loan to the children, which the children can repay over time. The terms of this loan can vary.
4. By providing a one-time gift (often thought of as an advance on the children’s expected inheritance). This is a sum of money that the parent(s) have no expectation of having repaid, and no interest is applied.
5. Parents purchase the house with the children and use their cash or equity towards the purchase.
When parents help a child into their own home this is effectively the transfer of wealth between generations. Be aware that there may be financial consequences for the parents / family member depending on the arrangement for the supply of funds. If you are lending funds to your children to buy a house, there are a few things that you need to consider
- What is the cost to you for the transfer of the funds, not just the loss of investment return?
- Will you have enough money to last you through your retirement without the use of those funds?
- If you put your home at risk by using it as a security for the deposit, have you considered the impact of the children defaulting on the loan and their home going to mortgagee sale?
- Do you have other children who may need your help at some stage, or who might get upset at the idea of you helping their sibling or putting your retirement security at risk?
Parents should seek legal advice prior to lending money, and if they are putting their name on the title of the property they should seek accounting advice also. If they sell the house within 10 years they could have a tax bill. This includes if selling their portion to the other party on the title.
If the parents are using their home as security to assist with the deposit, they should consider getting the deposit from a bank that is different to the bank that the children are using for their purchase. This will ensure that the amount of their home that is at risk is limited to the amount of the loan. If you use one bank for both properties the houses are effectively cross securitised. This means that if the loans go into arrears and a property needs to be sold to satisfy the banks debt, it could be the parents’ house that gets sold if that is the easier property to sell. The bank will not care which one gets sold as long as they get paid.
If you’re a parent considering helping your kids buy a house, make a time to have a chat with us about options.
We can talk you though what you need to consider, and put you in touch with the right people to provide you with further advice. Helping your offspring to buy a house is pretty awesome, so let’s get this conversation underway!