The bank of mum and dad has lent out a huge $22.6 Billion in loans according to Consumer NZ. This now sees the bank of mum and dad ranking fifth after ANZ, ASB, Westpac and BNZ when it comes to owner-occupier loans.
While this seems like an outrageous amount of money and pressure on parents, it is the reality of the process of buying a house in today’s property market. In 2002, the average house price in New Zealand was $186,000, which was six times the average income of $29,432 per year. Fast forward 20 years to 2022, and the median house price has risen to $890k, which equates to more than 15 times the median income of $56,836. The disproportionate increase in house prices means it is not hard to see why additional help has become somewhat of a necessity.
While schemes such as Kiwisaver and Kainga Ora’s first home grants offer some financial assistance, it is just not enough to keep up with the rapidly increasing house prices.
How are parents financially assisting first home buyers?
The most popular form of assistance is towards a house deposit with 61% of parents helping in this manner, and the average contribution towards a purchase being $108,000. The major barrier for a lot of people trying to enter the housing market is not being able to afford a deposit. This is where the bank of Mum and Dad has become pivotal.
Another form of support by parents is a guarantor. 18% of Bank of Mum and Dad parents are helping in this way. A guarantor is a person who agrees to be responsible for the debts of the person in the instance they default on payments or cannot afford to repay the debt.
How does this work from a legal perspective?
If parents are willing to help, it is important to determine what the nature of the assistance is. Whether the assistance is going to be in the form of help towards a deposit or guaranteeing the loan, and then what the repayment plan is if any?
For some scenarios, parents may not expect any form of repayment. This would be considered more of a gift. But in others, a loan from parents may have conditions attached, such as the parents’ contribution being conditional upon the sale of the property, or the separation of a couple when purchasing a home with your partner.
If a parent is providing financial assistance with conditions attached, it is recommended to consider the legal implications under the Property (Relationships) Act 1976. This may require a contracting out agreement, or a “gift form” signed by the parents. But in any case, seeking legal advice is recommended to ensure the assistance is undertaken properly.
At Godfreys Law we can help with all of these considerations. If you are looking to buy a property, get in touch with Chirs, Kym or Kate from our conveyancing team and they will help you through all the steps in purchasing your home.
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