There’s a sense of security that comes with owning your own home – and that’s a feeling that many parents would like to share with their kids. Up to nine out of ten first-home buyers are relying on help from their parents; the Bank of Mum and Dad is New Zealand’s sixth-biggest lender.
“I helped my daughter onto the property ladder,” says Tracy Creswell, Westpac mobile mortgage manager. “It took 18 months but it’s the best thing I ever did. It makes me feel better that she has the security and stability of owning her own home.”
Creswell has helped hundreds of Kiwi families get onto the property ladder and has a few tips for parents:
1. Your equity may not be enough – get your kids to clean up their credit
Hefty equity isn’t necessarily enough to make you a good risk from the bank’s perspective, especially if your income is decreasing. Instead, look for ways to make your child more attractive to the lender.
Banks look more closely than ever at individual spending, so show your kids how to demonstrate a history of saving and consider ways to eliminate their hire purchases and store credit cards.
2. Going guarantor is a riskier option
Being a guarantor seems simple, but it does come with risks for parents – gifts or loans are a better way to limit your liability if you can afford them.
“Guarantees tend not to be cleaned up when they’re not needed,” says Creswell. “Personally I prefer joint lending on a portion of the loan; it gives the kids a focus for paying it off rapidly and it gives parents the choice of how much exposure they have.”
3. There’s strength in numbers
Consider the possibility of working with more than one of your children, or with your child’s friends and their parents.
“I’ve seen three couples arrive in New Zealand and buy a house together,” says Creswell. “Then one couple moved out – the others bought them out and that money helped them into a new place. The other two couples eventually did the same and I financed each one into a new house. It worked really, really well.”
4. Building a new house can be a great idea
New homes are subject to slightly different lending rules, of up to 90% finance. Creswell says she worked with a family where the parents and son together bought a section and borrowed to build. The finished home was worth more than expected, so the son had 20% equity in their new house and he was able to refinance and own the house outright.
5. You could buy a rental, then sell it later to your kids
Buy a property for your child, in your own name, and rent it back to your kid and some flatmates. Then, at a later date, your son or daughter can buy the property from you. Parents often gift any equity to their child, says Creswell; “it does work quite cleanly.”
6. Keep track of gifted cash – or half of it could be lost in a divorce
Parents commonly gift cash to push their children’s deposit up to 20%, which is an excellent idea because a 20% deposit ensures you can get the best borrowing rates and conditions. Your lump sum gift needs protecting, or it can be split up after a relationship breakdown: “I’ve seen parents have to turn around and gift again to help their daughter and her children into a house,” Creswell says.
“You need to protect the intent of the gift, which is for your child and grandchildren.”