Are you considering helping your child buy a first home?
With Auckland house prices at an all-time high and far outstripping wage increases, it has never been more difficult to buy your first home. New LVR restrictions from 1 March 2021 require an owner-occupier to have a 20% deposit. With the Auckland median house price at $1,100,000, this means a deposit over $200,000. It is no wonder that many parents are looking to help if they can.
So what is the best way to help?
Gift
You can gift funds to your child. Banks prefer this as your child is not required to pay it back to you. Your child will prefer it as they are able to proceed independently. However, you will not be able to call back this gift if you need funds later in life.
Loan
You can loan funds to your child. This has the advantage that you can call it up if you need it or if your child is experiencing difficulties in a relationship or business. This benefits both you and your child. However, banks do not like dealing with another loan although they sometimes accept a loan with no interest payable, no security and only repayable on the sale of the property.
Guarantee
You can use the equity in your home to guarantee a part of your child’s bank loan. This is good in that you are not parting with your savings. However, the bank’s lending criteria are getting stricter (difficult for retired parents) and you also risk being liable to the bank if your child defaults on the bank loan.
Share ownership
You can buy a property together with your child. You get to benefit from any capital gain made. You are however involved in their bank borrowing and would need a very clear agreement drawn up to cover how the arrangement would work including the ability to exit.