Helping Kippers into a home is not something that should be done lightly. There can be quite unexpected downsides whatever the approach you choose, says Withers.
Issues parents encounter come in four main areas: legal, tax, family and financial. In real life worst case scenarios, parents have lost their homes to the bank, and families have developed permanent rifts.
It is imperrative to seek good legal advice from a lawyer, accountant, and mortgage broker at the very least. Skip this at your peril.
Here then are some of the many issues parents need to consider before signing on the dotted line:
1. Your kind-heartedness could destroy your children's work ethic. People who haven't worked for their deposits may be more likely to fall behind in mortgage payments and lose the home because they haven't learned to budget well and don't value the effort needed to own their own home. It's not a coincidence that banks like to see evidence that the home buyer has saved some of the deposit themselves.
2. Your children may not be able to buy you out at a later date. Parents who own the property themselves, in their family trust, or jointly with the child could just keep the property as a rental. Not every parent, however, wants to be a landlord to the public and/or the property might not be the most suitable to let on the open market.
3. Well-intentioned parents who have given money to the children to buy a house sometimes find the partner takes half in a relationship split. It's better to provide children with a properly documented loan, says Penny Henderson, relationships partner at Cavell Leitch lawyers.
Otherwise your child's current or future partner could be entitled to half of your gift, regardless of whose name the property is registered in. With properly worded and documented loans with a clause that says the loan is repayable on demand, there can be no argument later as to who the money belongs to. If your child separates, your loan can be called up.
Parents can even arrange for their lawyer to register a caveat over the property if they feel this is appropriate. This makes it harder for wayward children to borrow against the property without the parent knowing. What's more if parents lend the money, the children get to choose their own property and can use their KiwiSaver HomeStart grant to help fund the purchase.
4. Are you being more generous than you can really afford? Some parents put their own financial future in jeopardy by lending money that was earmarked for their retirement, says Withers. What's more, banks will usually try to "cross-collateralise" the children's property against the parents'.
If the children subsequently fall behind the bank can (and they do) take the parents' home to mortgagee sale. Banks often demand that parents sign an open ended guarantor agreement, which will cover all future borrowing by the children, not just the house.
5. Are you treating all your children equally and can they see that? What one parent or child might think is fair can be interpreted very differently by other members of the family.
Families can and do fall out over this stuff. Sometimes one child begrudges the help his or her siblings have received. Or the child in question misses mortgage payments, which leads to a falling out with the parents.
6. Beware of children whose expectations are too high, says Withers. If they feel entitled to buy a three-bedroom a villa in Grey Lynn as a first home you may not be helping their long-term financial future by enabling that to happen.
Something more modest such as a two-bedroom sausage block unit or basic home in Henderson, might teach them that they have to work hard to climb the property ladder.
Withers has advised many parents who want to help their children into a first home. He has found that the approach where parents lend the deposit to the children and let the younger generation own the property works best in many families.
