A look at New Zealand’s affordable housing crisis and how house prices have changed relative to incomes over time. Video / Paul Slater
Soaring prices are forcing first-time buyers to seek more financial assistance from their parents, a trend that threatens to widen the gap between the haves and have-nots.
Figures from Australia show that 60 percent of first-time homebuyers are now receiving parental support to get a foothold on the home ownership ladder, up from just 3.3 percent in 2010.
Australian parents are also making a record $ 89,000 contribution to their children’s deposits, analysts at Digital Finance Analytics said.
Although New Zealand does not have official statistics, Mortgage Lab mortgage brokers estimate the number locally to reach 60-70% as well.
Lending market mortgage advisor Bruce Patten said a member of his team specializing in helping first-time buyers said virtually every client he had worked with this year had received some form of parental help.
Hamilton’s mother Jane expects her to be called upon over the next five years to post part of the bond for two of her children.
She is grateful that she and her husband own their family home as well as three investment properties, but knows that many other parents do not have such resources to appeal to.
“I am deeply concerned about the unfair situation that exists for so many other hard-working families,” said Jane – who declined to give her last name.
“High rents leave people trapped in this cycle of never being able to save the deposit for their own property.”
The rise of Mommy and Daddy’s Bank is fueled by soaring real estate prices.
The median price of residential real estate in New Zealand rose 32.3%, from $ 620,000 in May 2020 to $ 820,000 in May 2021, the Real Estate Institute said.
Prices in Auckland have jumped 27%, from $ 905,000 in May 2020 to a record high of $ 1.148 million this year.
Some experts now estimate that Auckland buyers need income of up to $ 170,000 to buy, while typical deposits climb to nearly $ 200,000.
DFA estimates that Australian moms and dads currently have around $ 34 billion in loans on loan to their children, making the Bank of Mum and Dad the ninth-largest home loan lender in the country.
Martin North of DFA said parents contribute up to $ 250,000 in some urban areas.
It pushed up house prices, raised the national debt and made life more difficult for those without rich parents, North said.
Mortgage Lab chief executive Rupert Gough said a small proportion of Kiwi parents have made big contributions, such as buying properties with their children and putting their names on the title.
However, they were more likely to donate or lend smaller amounts for deposits, which could be as little as a few thousand dollars.
Tom Hartmann, of financial advice site Sorted, said a “huge intergenerational wealth transfer” was underway.
While parents previously waited for the inheritance to donate money or property, many now stepped in earlier to help their children.
But it can come with risks.
This included the failure to properly document the process so that it was perfectly clear whether the financial assistance was a grant or a loan.
“It is really essential to take professional advice, analyze the numbers and understand how this affects your own retirement planning, as these decisions can affect decades of life.”
Hartmann also knew of parents who sold the family home and left town to raise funds for the children, which could lead to social isolation.
Retirees might also underestimate the costs of moving to smaller areas.
This is because they generally wanted to live closer to essential services, which tended to be in more central and more expensive areas.
Hamilton’s mom Jane faces a similar dilemma.
She and her husband rely on the income from their three apartments to finance their retirement, but also want to give her children a helping hand.
Her mother helped deposit Jane’s first home in the mid-1990s when she was a young single mother.
Later, Jane’s mother left her an inheritance again which Jane and her husband used to purchase their investment properties.
Rising house prices had given them financial security.
“And you want it for your kids, so getting them into their own property will definitely be a priority.”
What are your options?
Here are six options for parents who want to help their children while protecting themselves financially.
1. Buy together
The biggest commitment parents can make is to purchase a property together with their child, which makes them fully liable in the event of the child’s default.
Patten of Loan Market said some parents use their family home or more generally an investment property to borrow their share of a deposit.
This could mean their child pays half of the 20% deposit and parents the other half.
But Patten said that’s only an option if mom and dad are still working, because banks won’t lend to retirees who don’t have regular income.
2. Go guarantor
Being a surety carries the same risk for parents who cover the entire value of the mortgage as if they had bought the new property together.
But parents can limit their risk by guaranteeing only part of a mortgage, for example up to $ 100,000.
The collateral can be released as soon as the value of the child’s property increases enough to give him enough equity to cover it.
Again, parents must work to act as guarantors
3. Clearing of bank accounts
Another variation is mortgage compensation, which allows parents with money on term deposits to reduce their children’s mortgage payments.
It works by allowing parents who might have $ 200,000 in a term deposit to forgo the interest they’ve earned and have that interest deducted directly from their child’s home loan repayments.
Bank of NZ, Westpac and Kiwibank are the only three banks to offer the service, as long as the parents’ term deposit and the child’s home loan are with the same bank.
Parents remain in control of their money and can access it at any time without waiting years for their children to pay it back, Gough said.
4. Loan of part of the deposit
A loan to bring the deposit up to the required 10 or 20 percent of the property’s value may be a cleaner way to help than putting your own assets at risk.
But Patten said banks generally prefer freebies over loans to keep borrowers’ total liability below the required loan-to-value ratio.
5. Give part of the deposit
For this reason, brokers say that gifts have become the most common form of parenting assistance.
Gough said it was crucial for parents and children to document the nature of the loan, including what happens to the gift if their child separates from their partner.
If the couple have been together for at least three years, the house will be treated as a property of the relationship and divided equally.
This meant that a common clause was to make the donation refundable in full when the house was sold.
Another way to organize the paperwork was to list the child and her partner as borrowers for the gift if they separated, meaning that both would have to repay the money.