Helping Your Kids Buy Their First Home: A Parent's Guide.

The dream of homeownership can seem increasingly elusive for many young Kiwis, with rising property prices and stringent lending criteria creating barriers. However, there's a powerful resource that many aspiring homeowners may be overlooking – the support of their parents.

This week, we'll explore various strategies that parents can employ to assist their children in achieving the milestone of purchasing their first home. From leveraging existing home equity to co-ownership, we'll cover a range of options tailored to different financial situations and risk tolerances.

Parental support can be invaluable, it's not without its complexities. We'll delve into the potential pitfalls and considerations that both parents and children should be aware of before embarking on this journey together.

Our goal is to provide you with the knowledge and tools to make informed decisions that benefit both generations without compromising financial stability or family relationships.

Assessing Your Financial Position as a Parent

Before embarking on the journey of helping your children purchase their first home, it's a good idea to conduct a thorough assessment of your own financial position. This step is fundamental in determining the extent of assistance you can provide without jeopardising your own financial stability or future plans.

We can help by taking a comprehensive look at your current financial situation. This includes assessing your income, expenses, assets, and liabilities. As part of this assessment we will consider the following aspects:

• Income stability: Evaluating your current and projected future income, including any retirement plans.
• Existing debts: Take stock of any outstanding mortgages, personal loans, or credit card balances.
• Savings and investments: Review your savings accounts, term deposits, and investment portfolios.
• Retirement plans: Consider how assisting your children might impact your retirement savings and lifestyle and suggest alternative options.

Calculating Available Equity in Your Home

For many parents, the equity in their home represents a significant potential resource for assisting their children.

To calculate your available equity:

1. Obtain a current desktop valuation of your property.
2. Subtract any outstanding mortgage balance from the property's value.
3. Consider that most lenders will allow you to borrow up to 80% of your home's value, minus any existing mortgage.

For example, if your home is valued at $800,000 and you have a remaining mortgage of $300,000, your total equity is $500,000. However, the accessible equity (80% of the value minus the mortgage) would be $340,000. So you would have $340,000 available to gift/lend to your kids.

Considering Future Financial Obligations

While it's natural to want to help your children, it's equally important to ensure that doing so doesn't compromise your own financial future. Here are some important things you need to consider:

• Upcoming major expenses: Are there any significant costs on the horizon, such as home renovations or medical procedures?
• Emergency fund: Ensure you maintain a robust emergency fund to cover unexpected expenses.
• Retirement lifestyle: Will assisting your children impact the quality of life you've planned for in retirement?

Stress-Testing Your Financial Plan

Before committing to any form of assistance, it's wise to stress-test your financial plan. This involves:

1. Modeling different scenarios: How would your finances be affected if property values were to decrease, interest rates were to rise, or if you face unexpected health issues?
2. Considering worst-case scenarios: What if your child loses their job and can't make mortgage payments? How would this impact your financial situation?
3. Family Growth: Consider how things may change if your child starts a family of their own and drops to one income. It’s better to have these conversations up front so everyone is on the same page.

By thoroughly assessing your financial position, you'll be better equipped to make an informed decision about how best to assist your children without putting your own financial security at risk.

Remember, the goal is to help your children while ensuring that you remain financially stable and able to enjoy your retirement years as planned.

Options for Parental Assistance

• Cash Gifts: This is one of the most straightforward ways to assist your children. You provide a lump sum of money as a gift towards their home purchase. The main advantage is its simplicity - there's no need for complex legal arrangements. Although New Zealand doesn't have a specific gift tax, you might want to check with your accountant to make sure there are no potential implications. You should also think about how this gift might affect your estate planning and relationships with other children to maintain fairness. It's advisable to document the gift formally to avoid any future misunderstandings.
• Family Loans: A family loan offers a more structured approach to financial assistance. You lend money to your child with agreed-upon terms for repayment. This method maintains clear financial boundaries and can potentially earn you interest, albeit likely at a lower rate than commercial lenders. The terms can be tailored to suit both parties' needs, offering flexibility. However, it's important to have a formal loan agreement drawn up by a lawyer to protect all parties involved. Be aware that lenders will consider this loan when assessing your child's borrowing capacity for a mortgage.
• Equity Release: This option involves leveraging the equity in your own home to assist your children, often through a top up or refinance. It can provide access to substantial funds without immediate out-of-pocket costs. There may also be potential tax benefits if the loan is structured correctly. However, this approach increases your own debt and uses your property as collateral, which could impact your retirement plans and financial flexibility. It's essential to talk this over with a Mortgage Adviser so you can carefully consider the long-term implications of this strategy.
• Guarantor Loans: By acting as a guarantor on your child's mortgage, you can help them secure a loan with a smaller deposit or more favourable terms. This can enable them to enter the market sooner and potentially access better interest rates. Some lenders offer products that limit the guarantor's liability to a specific amount, reducing your risk. However, being a guarantor means you're legally responsible if your child defaults on the loan. It may also affect your own borrowing capacity for future needs. It's a must to have a clear exit strategy for when and how your guarantee will be released.
• Co-ownership: This involves buying the property together with your child, where you both contribute to the deposit and mortgage payments. It allows you to benefit from potential capital gains and increases overall buying power, as combined incomes may allow for a more expensive property purchase. You can plan for your child to buy out your share over time, providing a gradual transition to full ownership. However, this option comes with legal complexities and requires clear agreements on ownership percentages, responsibilities, and exit strategies.

Each of these options has its own set of advantages and considerations. The best choice depends on your financial situation, risk tolerance, and family dynamics. That's where talking to a Mortgage Adviser together can be beneficial.

We can help you to carefully consider each option to ensure you're making the best decision for both you and your children.

Key Takeaways:

• Assess your financial position thoroughly before offering assistance
• Explore various support options and choose one that aligns with your financial situation and goals
• Formalise agreements and consider legal and tax implications
• Encourage your child's financial independence and responsibility
• Structure support for long-term success and gradual reduction of assistance
• Seek professional advice from financial advisers and legal experts
• Maintain open communication and regular financial check-ins with your child

Remember, the goal is not just to help your children buy a house, but to set them up for long-term financial success and independence.

By working closely with a Mortgage Adviser, carefully considering these strategies and tailoring them to your family's unique circumstances, you can provide invaluable support in your child’s journey to homeownership while ensuring your own financial stability.

Feel free to reach out if you need a hand!

Dallas Roberts

027 218 8795

?? [email protected]