When Vicki and Mike Crosby's daughter and her partner started looking for a house, Mum and Dad put up their hands to help. The couple had assets and were willing to use them - they had worked overseas for 21 years and bought two rental properties as well as their home in Torbay. And Vicki, who has worked in real estate, had the expertise and the passion. "It's a concern that your children are being locked out of the market," she says. Daughter Aimee, 31, a teacher at Westlake Girls' High School, and her partner Ben Thomsen, who co-founded product design firm Blender Design, earn about $130,000 a year between them and can service a mortgage. But they had only a limited deposit, mainly about $15,000 in KiwiSaver. Buying in Auckland seemed out of the question, so they started looking in Hamilton. "We were not even considering Auckland," says Aimee. "It was just going to be an investment that would sit there and we'd rent it out and we'd use that to buy into Auckland way down the line." But they kept missing out at auctions and Vicki grew worried. "We just watched the market in Hamilton move upwards and I got a bit nervous about it for them, really." Then she spotted an opportunity: a double section being sold as a single lot at Stanmore Bay on the Whangaparaoa Peninsula. They couldn't afford the whole block but, if it failed to sell jointly, they decided to bid for one of the two sections that was largely vacant, apart from a run-down garage. Mike and Vicki put up one of their rental properties as security for the entire mortgage. Ben and Aimee frantically drew up a plan to build a house, largely in the shell of the old garage, for just $200,000. The auction went as they hoped. The combined lot failed to meet the reserve price, so they picked up the section they wanted for $450,000. Servicing a 30-year mortgage of almost $650,000 will cost about $800 a week, but they believe they can manage. "We were paying $300 a week in a flat so it's a big step up," says Ben. "But we could get in flatmates. And I'm working on some million-dollar ideas at work, and if one of those comes off, we're sweet." Vicki and Mike, a psychologist, are happy. "It's good to be able to help," says Vicki. Aimee jokes: "I think they were more worried about us being able to buy than we were." These days, mortgage brokers say, most first-home buyers like Aimee and Ben are drawing on the "Bank of Mum and Dad". "I would go so far as to say it's unusual to see first-home buyers who haven't had some form of assist-ance from family," says John Bolton of Squirrel. Brokers in different parts of town say a quarter to two-thirds of first-home buyers get help from parents. All agree it is much more common than it used to be, for two reasons: first, the October 2013 Reserve Bank move forcing banks to require at least 20 per cent deposits for at least 90 per cent of their home loans; and second, skyrocketing property values. Parents with spare cash have always helped their children into houses, Bolton says. "What is different now is that often we see parents borrowing money on their own properties to help form the deposit for the kids, so it has moved beyond having a bit of spare cash. "A hell of a lot more parents are getting involved. It has gone from the ones that could afford it to a much broader range." And when parents borrow money to help, or offer their own homes as security, they are vulnerable. "I worry about parents guaranteeing property," says Retirement Commissioner Diane Maxwell. "We see lots of guarantees going pear-shaped."
What are your options?
For parents facing the dilemma of wanting to help their children but also wanting to protect themselves, here are six options.
1. Buying together
The biggest commitment parents can make is to buy a property jointly with their child, making them fully liable if the child defaults. Jeff Royle of iLender quotes a mortgage he arranged recently for parents and their son, an apprentice. "Mum and Dad own a house worth close to $1 million and there's only $100,000 [debt] left on it," he says. "The son is an apprentice in a trade so his income path is quite good, but today his income doesn't support a mortgage, so Mum and Dad are coming in with him now so he can get into the market." He says this is an option only if Mum and Dad are still working. The bank wouldn't take the risk if they were retired.
2. Going guarantor
For Mike and Vicki, who put up their rental property as security for Aimee and Ben, going guarantor entails the same risk to the entire value of the mortgage as if they had bought the new property together. But you can limit your risk by guaranteeing only part of a mortgage. This is what journalism lecturer Allison Oosterman did when her son and his partner bought a West Auckland home eight years ago. "I lent them $20,000 and I went guarantor up to $100,000 with the bank. I think they paid about $450,000," she says. "The agreement was I would be liable up to $100,000 but no more. I was living in almost a freehold house that was worth a lot of money, and I thought I'd wear it." The guarantee can be released as soon as the value of the child's property rises enough to give them enough equity to cover it.
3. Offsetting bank accounts
Karen Tatterson, of the Professional Advisers Association, says a variation on the guarantee is to offer the parents' money in the bank as guarantee for a loan. "Mum and Dad might have, say, $200,000 in a term deposit and the bank holds the term deposit as security," she says. "The children are buying at, say, $800,000 and need a $160,000 deposit. So the bank would hold an interest over, say, $80,000 of the term deposit and lend the children the full amount of that money. "That allows them to go over the 80 per cent [loan to value ratio]. But we do have to make sure that Mum and Dad and the children have had independent legal advice around the risk." Alternatively, Bank of NZ, Westpac and Kiwibank allow home-loan borrowers to use their parents' deposits with the same bank to offset the outstanding value of the mortgage, paying interest only on the difference. The price is that parents do not earn interest on their deposits. But the interest rate saved on the home loan is usually higher than the interest rate the parents could earn on their deposits, so the family as a whole is better off.
4. Lending part of the deposit
A loan to bring the deposit up to the required 10 or 20 per cent of the property value can be a cleaner way to help than putting your own assets at risk. But Ponsonby lawyer Tony Steindle says banks usually prefer gifts rather than loans to keep the borrowers' total liability below the required loan-to-value ratio.
5. Gifting part of the deposit
For this reason, brokers say gifts have become the most common form of parental help. One North Shore couple gave $25,000 towards a deposit for their first son a few years ago, and upped it to $30,000 when their second son bought recently to allow for inflation. Another couple sold a property so they could give one child about 25 per cent of the value of a house, and sold another property to a second child at a discounted price. In Oosterman's case, her gift of $20,000 for one son was made on condition that it would be taken off his share of any inheritance when she dies. "I have four children. I want to treat them all fairly," she says. Steindle advises parents who give money like this to put the details in their wills. He also advises parents to specify what would happen to their gift if their child is buying the house with a partner and that relationship later ends. If they have been together at least three years, the house will be treated as relationship property and divided equally. "So as a lawyer, we tend to say, 'Well, loan them the money, but make both of them the borrower, so if they split up all the money comes back'."
6. Gifting land
Lesley and Alan King, who are now in their 70s, have lived on a 0.9ha block in Massey for almost 50 years. In 2013 they gave a corner of it to their son, his wife and their then 18-month-old daughter, who had been staying with them for more than a year because of the cost of renting anywhere else - let alone buying. "We have given him his land from his inheritance," Lesley says. Three years later, the son, his wife and their two children are living in their new house. "It's working well having the grandchildren next door. "We are very, very happy with the outcome in every way except financially." It has cost them $130,000 in surveying, Watercare and council fees just to subdivide the land, including giving an area near a waterway to the council. "We are retired," she says . "The $130,000 has been a big, big chunk out of our investments. "We thought we would have been able to take nice overseas holidays, but they are going to be more limited from now on."