The ‘Bank of Mum & Dad’: 5 tips for First Home Buyers

The ‘Bank of Mum and Dad’ has been referred to as a means for parents to help their adult children - aspiring First Home Buyers - to enter the market. But how can parents practically do this?

Family discussion
  • 29 March, 2017
  • RESIDENTIAL
  • First home buyers, Parents pay deposit, First home loans

Below are five tips to consider:

1. Lend the money

If parents are fortunate enough to have some spare cash, they can lend the deposit to their children on a commercial basis.  Alternatively, they may have equity locked up in their home, so by establishing a line of credit facility they can on-lend the deposit to their children for their first property. In either scenario, there should be a formal loan agreement drawn up between both parties and registered with the appropriate authorities. 

2. Provide personal guarantees

This is a true test of faith in children. If parents have any property or other assets, these could be used as securities in the form of personal guarantees to the lender; this may be limited to the amount of the deposit of the new property – but still somewhat risky if there’s a default on the loan!

3. Joint venture

A joint venture arrangement could be entered into as ‘Tenants in Common’, whereby parents put up the cash for a percentage of the property and allow the child to use the property as security for them to buy their own share. If the child is living in the property, appropriate rental agreements should be put in place or even consider using an agent to ensure this is managed at arm’s length. 

4. Education - the earlier, the better

Encourage children to absorb property know-how and improve their financial literacy skills. For example, encouraging them to attend seminars on money management and property. If Mum and Dad can start teaching their children about money management early in their life, this will help them manage their money better and build the deposit for their first property.  

5. Encourage children to become “RENTVESTORS™ and think of the regions

Cities like Auckland and Wellington are out of reach for many First Home Buyers. Rentvesting is when the purchaser acts as a landlord on their property – often in an affordable suburb or region – while renting another property, close to their work, friends and other lifestyle factors. Their investment property may be negatively geared at first, so ensure they can fund the shortfall as well as the loan repayments. 

Disclaimer: This information is of a general nature and you should seek independent financial and legal advice before entering into any arrangement. 

Article by David Naylor – Co-founder of Chan & Naylor Property Accounting & Wealth Advisory Group

 

LJ Hooker NZ

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