Bank of mum and dad alive and well

A recent Kiwibank survey of 2008 respondents shows 31% of those with children can give mortgage borrowing support to them. And 65% of Gen Z and 43% of millennial homeowners have used parental support to get into a home.

Eureka Financial Services says as the economic landscape continues to evolve, it is important to ask if the ‘bank of mum and dad’ will still be a viable option next year, or is it time to rethink this financial assistance model?

While the bank of mum and dad will likely remain an essential financial tool for many young Kiwis, the benefits must be weighed against the risks, the financial services company says. 

While this might be a prime time for families to step in and offer support because of falling interest costs, Eureka says, however, parents must carefully consider their ability to assist without compromising their financial future.

A struggle

Recent data shows that saving enough for a deposit is a struggle for first-home buyers as household incomes are squeezed by rising living costs, despite a cooling in the housing market.

In this context, the bank of mum and dad provides a much-needed boost. Whether helping with a deposit, offering a loan for the full amount, or acting as a guarantor for the mortgage, parents have been stepping in to fill the financial gap.

It provides an advantage to younger buyers by speeding up home ownership, building long-term wealth, giving more flexible loan terms than traditional banks at often lower interest rates, providing more forgiving payment schedules and creating a legacy.

However, Eureka says helping children with home ownership comes with risks that must be carefully considered.

These include putting financial strain on parents, particularly if they are nearing retirement while  living costs are rising, potential for family tension and complicating family dynamics, legal challenges as family loans can easily lead to misunderstandings, particularly without formally outlined terms.

The financial services company says it is crucial to approach family loans cautiously and create a legally binding formal loan agreement outlining the loan amount, repayment schedule and interest rates if there are any.

If a family loan is not treated as a gift there may be tax consequences. Parents need to be aware of gift taxes or potential implications if the loan is forgiven or offered at below-market rates.

To prevent family conflict, Eureka says it is essential to have a frank discussion about expectations, the terms of the loan, and the potential impact on the family’s financial situation.

Consulting with a lawyer or financial adviser can help ensure the loan agreement is properly structured and all legal and financial implications are considered.

It is important, Eureka says, to approach the decision with clarity and professional advice. By understanding the potential rewards and risks, parents can help their children achieve their homeownership goals without jeopardising their own long-term financial security.