Helping your kids 'get on the property ladder?'
As house prices around the country continue to soar we are seeing more parents wanting to help their kids step onto the property ladder.
So parents, how can you give your kids a leg up on scraping together that ever increasing deposit?
Gifting a deposit
A one-off gift toward your child’s deposit - this is the most obvious option and also the one that gets used most often.
However, unless you (or your parents) are in the fortunate position of having cash savings around you might quite rightly be thinking – great, a gift, that much was obvious – but where the heck would I get $10, 20, 40… 100 thousand dollars from?
Good question. While increasing house prices are not great for first home buyers, the price increase can be a good thing if you already own property with a mortgage that you can leverage and withdraw funds as a gift toward your child’s deposit. So how does this work?
If you bought the average Taranaki home in 2015 for $310,000.00, that property would be worth in the range of $480,500.00 today. This $170,500.00 increase in the value of your home is called equity and depending on your circumstances it can be used to help your children get on to the ladder.
How you choose to access your equity will depend on your circumstances, but the easiest way if you have an existing mortgage is to contact your bank to get the additional funds added to your home loan. If you do not currently have a home loan then get in touch with a savvy mortgage broker or bank manager to steer you on the right path.
A risk to bear in mind with gifting a deposit however is if your child is married, in a de facto or other qualifying relationship is that your gift can become ‘relationship property’ (and be subject to equal division on separation). Assuming you want only your child to keep the benefit of these funds if a break up was to happen, we highly recommend getting in touch with a lawyer to get some protections in place to ensure that this is what happens.
Lending the deposit
Not all deposits are gifted - you can choose to lend the funds to your child instead.
The key to gifting a deposit is to discuss this with your bank early on in the piece to make sure that your arrangement fits their requirements – all of the banks are different in this regard. Generally, the banks are fine with loans as long as they are structured in a way that does not compete against the bank.
What does this look like – your loan terms will need to be in writing and will generally need to confirm that the loan is interest-free and repayable only on the property’s sale. The bank will also want to see a copy of the loan agreement if you choose to go down this route so get in touch with your lawyer to draw up the agreement early on in the piece.
If done right, loaning the deposit can also be an excellent way of protecting funds from becoming ‘relationship property’ in the event of a break-up but again, we recommend discussing your unique circumstances with your lawyer.
Acting as guarantor
This involves signing a guarantee offering the equity in your home as security for your child’s home loan.
Parents guaranteeing first-home loans means that you do not need to come up with a sum of money, but we have seen them become less common lately however and for good reason – they are risky, can turn bad, and can be more costly than the other options. You will also both need to be with the same bank which is not always realistic (or the best option).
If you are interested in guaranteeing your child’s loan there are two things to negotiate with the bank - limits on both the dollar value of your guarantee and the time you are left ‘on the hook’ under the guarantee.
Going in together
Some parents choose to buy jointly with their children – your children get a foothold on the ladder sooner (they can even still access Kiwisaver and Homestart Grants, if eligible) and you still get to share in any capital gains. These arrangements are however the most challenging from a legal perspective and are not always popular for parents wanting their children to stand on their own.
The chances of things getting ‘complicated’ compound if you are not living in the property and plan to be more of a passive investor instead - think, who pays rates, insurance, maintenance, or what if one of you wants to cash-out ...
Before buying in with your child we would always recommend having plenty of discussions to make sure that expectations are fully aligned and captured in writing – preferably in a professionally prepared ‘Property Sharing Agreement’.
Still have questions or wanting FREE advice that is specific to your situation?
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