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Is it time to close the Bank of Mum and Dad?

Is it fair for kids to expect help to buy a house? Amy Hamilton Chadwick finds that being your kids’ bank can damage your wealth, income, and lifestyle.

8 March 2022

There’s only one bank that sometimes gives out huge cash gifts, may guarantee your loan repayments and treats you like its No.1 customer – the Bank of Mum and Dad (BOMAD).

Between half and 70 per cent of Kiwi first home buyers are assisted by BOMAD, says Katrina Shanks, chief executive of Financial Advice NZ, but she says rising prices add an extra tension to the situation.

“Historically, parents have always helped their children with first-home deposits.

“The big difference now is that the deposit is so much larger, so the stretch is so much bigger for both parents and kids.

“There’s a lot more money at stake.”

‘We didn’t have an option’

Until 2018, Michael* and his wife Caroline were enjoying a very high standard of living.

They spent two months a year travelling and lived in a spacious central Wellington family home.

Their daughter Lucy was married and owned a home with her husband Dan. Michael and Caroline had contributed to that deposit with a large gift of cash.

But four years later, it all fell apart. They found out that Dan had drawn down almost all the available equity (via revolving credit) to try to prop up his struggling business.

The business failed, and Dan and Lucy
split up.

“It was the most stressful thing we’ve ever experienced,” says Michael.

“There wasn’t much left from the sale of the house, and Lucy was only working part time, so she couldn’t afford to buy a decent place.

“We realised pretty quickly that a single mum with two kids and a big dog wasn’t going to be any landlord’s first-choice tenant. And our worst nightmare was that she’d move out of Wellington and we wouldn’t get to see the grandchildren much.

“Honestly, not helping her didn’t feel like an option.”

Michael and Caroline sold the family home and downsized into a townhouse, buying Lucy a three-bedroom home nearby. They’ve also been helping her pay the mortgage, rates and insurance.

“We’re really stressed about the finances, because we’re servicing a lot of debt,” Michael says.

“Instead of working less, I’ve been trying to figure out ways to bring in more money and work longer. I think it’s been worth it, but it’s certainly come at a big cost.”

Children may pressure parents

Grandchildren can be the make-or-break factor, says Hanny Naus.

As the educator for Elder Abuse and Neglect Prevention at Age Concern New Zealand, she sees the worst-case scenarios for BOMAD.

Sometimes it’s adult children whose parents have helped them into expensive houses, while the parents themselves live hand-to-mouth, trying not to turn on the heaters in winter.

As house prices have risen, so has pressure on homeowning parents to help their kids onto the housing ladder, says Naus – sometimes from the children themselves.

It’s hard to resist when your children say, ‘You wouldn’t want your grandchildren growing up in a house with no garden, would you?’, or ‘I couldn’t bring the kids to visit if we lived that far away!’

As parents age, children can become very bossy, says Naus, but don’t stretch yourself too thin.

“Your money is yours until you die. It has to be there when you need it – $10,000 for really good hearing aids can be the difference between an older person being socially engaged, versus isolated and depressed.”

Is BOMAD problematic?

From basic living costs to missed investment opportunities, becoming your kids’ bank can have an impact on your wealth, income and lifestyle. BOMAD may also have an impact on the wider market.

“All else being equal, it’s adding buyers to the market that otherwise wouldn’t be there,” says Kelvin Davidson, Senior Property Economist for CoreLogic.

“When there’s a tight supply of property, this adds price pressure. But parents don’t usually worry about that; they’ll just do whatever it takes.”

In addition, if only wealthy people can afford to help their children into homes, there’s a risk that we widen New Zealand’s wealth gap by creating a chasm between homeowners and non-homeowners.

However, that doesn’t need to be the case. As Davidson points out, renting is not a path to financial insecurity and as more protections come into place for tenants, perhaps New Zealand can decouple home ownership from the Kiwi dream.

In places like Germany and Switzerland, renting is part of the culture and more than half of people rent for the long term.

The other potential downside is that an over-generous BOMAD could leave your children without the skills they need to be independent and resilient.

If you do fund your kids into a house, Shanks recommends you set them up with some financial advice, hopefully giving them positive money habits for the future.

Get it all in writing

If there’s one vital element that everyone agrees on, it’s that you should document every decision and get professional advice.

Talk to your lawyer (not the same one your children are using!) and your accountant or financial adviser. You must fully understand the repercussions of the choices you’re making.

Take time to consider all your decisions – don’t be rushed into anything.

Explain your choices to your whole family, don’t keep secrets, and have your professional advisers in meetings to back up your choices with their expertise.

“Sit everyone down and explain calmly and formally what you plan to do,” Naus recommends.

“Your adviser can show them what money you need to keep and why. You can make it clear that you’re not being mean, you want to help, but you can only afford to do so much.

“Don’t forget that it’s your money and you need to take care of yourself!”

*Names and some details changed to protect privacy.

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