Bank of Mum & Dad: Pros and Cons of helping kids purchase their first home

A combination of low-interest rates and soaring house prices have seen many young Kiwis struggle to get on the property ladder. It’s no surprise that more and more are turning to the bank of mum and dad for help with the deposit. 

However, before committing to a financial leg-up, it’s important to know the full picture. Here’s a quick guide on all you need to know about helping family members with a house deposit. 

Ways to help

When it comes to the bank of mum and dad, there are three main options: 

  1. Gift, The most popular option is to gift children some money for the deposit. There's no expectation of repayment, and many parents consider it an early inheritance. 
  2. Loan, It could be an interest-free loan, or it could have interest attached. There is scope to tailor these arrangements so, for example, some don’t require repayment until the property is sold. 
  3. Borrowing against equity, Often parents don’t have access to cash as their money is tied up in investments. With this option, the bank of mum and dad borrows against the equity in their own home. 

Pros and Cons of family assistance

As with most things in life, there are pluses and minuses involved. And what's right for your family may not be appropriate for someone else's. 

On the plus side are the following: 

  • Ability to act faster: Rather than spending years saving for a deposit, parental help means young Kiwis can get into the market sooner. 
  • Lower or no interest rates: Parents can offer the kids a better deal than other lenders. 
  • Flexibility: Mum and Dad can be more flexible than banks when it comes to repayments.

However, there are some potential downsides to consider: 

  • Financial strain: Parents may feel obliged to help, as a result putting themselves under financial pressure.
  • Tense relationships: Family relationships can suffer, especially if help is given to one child over another.  
  • Change in circumstances: Unforeseen job losses, family breakups or change in financial circumstances can all have an impact on what initially seemed like a good plan. 

The way forward

If the bank of mum and dad is the right option for your family, then here are some tips to make it a success. 

  1. Be honest and upfront
  2. Be realistic 
  3. Plan for the unexpected
  4. Get professional advice

A professional adviser will ensure you have fully considered all the implications, including any legal requirements. 

So, before signing on the dotted line, get in touch with our Loan Market advisers for more expert advice.