Threefold

Helping Your Children Buy Their First Home

The New Zealand property market has seen significant changes recently. While property prices have been high, recent data suggests a potential cooling in some areas, which coupled with an expectation that interest rates will fall over the next twelve months, provides opportunities for first-time buyers.  

Despite interest rates hovering around 6 – 7%, influenced by the Reserve Bank’s monetary policies to combat inflation, first home buyers remain a key presence in the property market, accounting for around 26% of purchases (CoreLogic: First Home Buyer Report for Q1).

As first home buyers look to take advantage of limited competition and good availability of housing stock in many areas, we are seeing a rise in the ‘Bank of Mum & Dad’ stepping up to help their children secure their first home, often releasing equity from their existing property and putting it towards helping their kids.

It is our belief that we are currently sitting towards the bottom of the current market cycle. With plenty of stock available and interest rates forecast to fall over the next 6-9 months, for cashed up buyers, it is likely an ideal time to buy.  

The Options…

If you are considering helping your children enter the housing the market, there are several ways to achieve this, each with its own benefits, considerations and budget implications. 

1. Gifting Part of the Deposit

One straightforward method is to gift a portion of the deposit to your child, as New Zealand does not have a gift tax. This immediate financial boost can significantly reduce the loan amount needed. If you have multiple children, it is worth thinking about whether you have the ability (and desire) to treat all your kids equally to avoid any resentment within the family.

2. Lending Part of the Deposit

Another option is to lend your child money towards the deposit, either interest-free or at a low interest rate. This can be beneficial for both parties, but it’s crucial to formalise the loan with a legal agreement. This ensures clarity on repayment terms and protects both parties in case of future disputes. It is also worth noting that lenders typically do not like ‘lent’ deposits, unless a legal agreement is in place that stipulates the deposit is only repayable upon sale of the house.

3. Guaranteeing Part of the Loan

Acting as a guarantor on your child’s mortgage is another option to help them secure a larger loan or better interest rates. However, it is important to note that this means you’ll be responsible for repayments if they default. This option carries significant risk and requires careful consideration of your financial situation and potential liabilities.

4. Investment Property for Future Transfer

Purchasing an investment property with the intention of transferring it to your child at a later date or selling it to them at a favourable rate, can be a strategic move for both the parent and child. This option enables the parent to lock-in the house price now and then allows the property to potentially appreciate, while at the same time providing rental income.

The changes to the bright-line test coming in on 01 July 2024 may be beneficial to parents considering this option, as from this date the test will only apply if the property is sold within two years of purchase. This means that it should be possible for the property to be transferred to the child (or on-sold) without being subject to the bright-line test after only a two-year period, rather than the current ten years (or five if purchasing a new build).

5. Buying Property in Partnership

Co-purchasing a property allows shared ownership between you and your child. This can ease the financial burden and provide a sense of joint investment. A legal agreement outlining each party’s responsibilities and share is essential to prevent misunderstandings or disputes, and it is also important to outline what will happen in the event that one party needs their investment returned.

6. Making sure your children are financially literate from an early age

Sometimes, the most valuable support is guidance. Educate your children on financial planning, saving, and the complexities of property ownership. Encourage them to consult with financial advisors and mortgage brokers to explore their options comprehensively.

7. KiwiSaver Contributions

It is also worth considering opening a KiwiSaver account for your child and contributing to it from an early age to help them accumulate savings for a home deposit. KiwiSaver funds can be used for a first home purchase under specific conditions, making it a tax-efficient saving strategy.

Food for thought…

Helping your child buy their first home is a significant commitment. By understanding the various options and their implications – along with planning ahead – you can make informed decisions that benefit both you and your child.

If you are considering helping your child onto the property ladder, we are here to help.

The content of this article should not be taken as financial advice, or a recommendation of any financial product. Threefold is not liable or responsible for any information, omissions, or errors present. We recommend seeking advice from a qualified financial adviser before taking any action.