Helping Your Adult Child Achieve Homeownership

 

Remember that wide-eyed look your kid had when they first toddled around the house? Now, they’re all grown up, with dreams (and maybe some student loan debt) as big as their future. Homeownership might seem like a distant dream for them, especially with the housing market getting more volatile every month.

The New Zealand property market can be a beast for first-time buyers, and the biggest roadblock for most young Kiwis is the deposit. Let’s face it, saving a 10% chunk of change with skyrocketing house prices feels like filling a bucket with a teaspoon. As a parent, you naturally want to help your child achieve their dream of homeownership, but it involves a careful juggle between supporting your child and protecting your own financial security. Here’s how you can help!

Financial Gift

One option is to offer a financial gift towards their deposit. It could be a lump sum or smaller contributions spread out over time. This can significantly shrink the mountain they’re facing, bringing that dream home a whole lot closer. The beauty? It’s a gift, not a loan. They won’t be tied down by repayments, giving them more financial breathing room.

Now, before you start emptying your savings account, there are tax implications to consider. Depending on the size of the gift, there might be tax consequences for both you and your child. A quick chat with a financial advisor can clear things up and ensure everyone’s on the same page.

Using Your Home to Help Theirs

Another option is to use your existing home equity to help your child. Here’s how it works: you become a guarantor on their mortgage. This basically means you’re saying, “Hey, bank, if my child stumbles, I’ll step in and cover the repayments.” This can unlock a bigger loan or a lower interest rate for your child, opening doors to properties they might not have been able to afford otherwise.

For you, it’s a way to support your child’s dream while potentially benefiting from the property’s long-term value increase. But remember, being a guarantor is a big responsibility. If your child can’t make the repayments, it falls on you. So, have open and honest conversations about their finances and commitment before taking this leap.

Co-Signing a Mortgage

Co-signing a mortgage is another option. This means you take out the mortgage together with your child. It’s a good choice if their income alone isn’t enough to qualify for a loan or a decent interest rate. The upside for your child? They get on the property ladder sooner and potentially secure a better rate. For you, it allows some control over the property and ensures the repayments are being made.

However, co-signing comes with significant risks. If your child defaults, both your credit scores take a hit.  And if they can’t make repayments, you’re liable.  Co-signing should only be considered if everyone involved is comfortable with the financial commitment and has a clear exit strategy in place.

Bank of Mum and Dad

Let’s talk about the informal “Bank of Mum and Dad.”  This essentially means lending your child money directly to help with the purchase. There are a few things to consider here.

Formalise the Agreement

While a handshake might feel good, having a written agreement outlining the loan terms, interest rates (if any), and repayment schedule protects everyone involved.

Be Clear About Expectations

Is this a true loan that needs to be repaid or a more flexible gift with less pressure? Discuss repayment timelines and interest rates openly to avoid misunderstandings down the road.

Make sure they understand the financial responsibility they’re taking on and be clear about your own limitations.

Open Communication

No matter which approach you choose, talking things through openly and honestly is a must. Discuss your financial situation, their budget, and their long-term goals. Be upfront about your expectations and limitations.

Professional Advice

Helping your child buy a home is a big financial decision. Don’t go it alone! Seek professional advice from a financial advisor or mortgage broker. They can explain your options, assess your child’s financial situation, and recommend the most suitable approach for your unique circumstances.