The risks of opening an account with the bank of mum and dadby Sharon Stephenson
When the kids can’t afford a house, who they gonna call? These days it’s very likely to be their parents who, with all the other mum and dad funders, now constitute the sixth-biggest home-loan lender in the country. A tidy solution, surely, except sometimes it goes horribly, heartbreakingly wrong. Sharon Stephenson investigates.
Number 18 is about halfway down the street, almost indistinguishable from its pastel-coloured neighbours. It’s been some time since Helen Fleming* last saw the home she helped her son Matt and his wife Alana buy in late 2013. Someone else owns it now.
“Matt would never have let the grass get so high,” says Fleming sniffily, as we sit in her car outside the modest three-bedroom home.
The 62-year-old once owned almost a third of it, thanks to the $80,000 interest-free loan she gave her only child, who paid a shade under $300,000 for the 1960s property. Recently returned from six years in London with nothing even close to a deposit, the science teacher, his stay-at-home wife (both then 28) and their infant son spent a year sharing the small Lower Hutt home owned by Fleming and her second husband Scott, who’s a retired mechanic.
Timing wasn’t on their side: not only were house prices rising, in 2013 the Reserve Bank introduced measures to reduce the amount of low-deposit mortgage lending, forcing banks to require a deposit of at least 20% for at least 90% of their home loans (known as a loan-to-value or LTV ratio). “Just like that, Matt had to come up with $60k for his deposit. Even five years ago, before the property market in Wellington really went crazy, it was difficult finding something in their price range.”
But then Fleming, a public servant, was made redundant and received a hefty pay-out. She offered it all, as well as cashing in a term deposit, to her son as an interest-free loan on the Petone house he had his heart set on. “I felt like I was in a position to help, because Scott and I had worked hard and lived modestly to pay off our own mortgage and have some cash in the bank. We didn’t need the money back then.”
As the words fumble their way across her tongue, Fleming admits she doesn’t come from a culture of home ownership. “My grandparents and parents always rented and it was assumed I would, too. But like many baby boomers, I was able to buy a tiny flat, then upgrade to a bigger house.” Matt, however, faced a very different housing situation. “He saw home ownership float further and further from his grasp. I wanted Matt to experience the security and pleasure of having somewhere warm, safe and dry to raise his son, just as I had.”
The couple used Fleming’s loan as their deposit, with the rest going on kitchen and bathroom renovations. But then Fleming and her daughter-in-law fell out and the couple cut her from their lives. “The plan was for them to pay $100 a week whenever they could, which never happened. I didn’t even know they’d sold the property until I saw it on Facebook, where Matt was boasting about the profit they’d made! They’re now living the high life on the Gold Coast with my money but haven’t paid anything back. I’ll probably never see any of it.”
Her downfall was not having the loan agreement legally documented, which meant she had no comeback. “The lawyer suggested it at the time, but he’s my son. You don’t think it’s going to go wrong,” she says.
Fleming believes there’s no turning this Titanic around. “Losing $80k is a huge blow to our retirement savings because we thought we’d be able to kick back and enjoy the odd overseas holiday, but now we’ve got nothing. We’ve also had to find part-time work, which I didn’t expect to be doing at this age. And all the while my son has a much nicer life than us, which doesn’t seem fair. But what can I do about it? At the end of the day, he’s still my son and I can’t hate him for what he’s done.”
* Names changed on request.
Back in the day, a lump sum from parents to finance offspring into their first home was common only in wealthy circles. But as first-home buyers flail in the economic tailwinds of a housing crisis and stagnant incomes, with houses in New Zealand now costing up to 10 times the average income (compared to two to three times in the 1980s), parents across the financial spectrum are stumping up the deposit, and sometimes even mortgage payments, for their children.
“A good degree and a decent job will no longer automatically give you the financial breathing space to save for a deposit,” says Auckland financial adviser Bruce Sheppard. “Millennials, in particular, have been hit hard in recent years by real estate prices climbing much faster than average incomes. For many couples, a withdrawal from the bank of Mum and Dad is the only solution.”
Some offer the lump sum as a gift, others as an interest-free loan. Many parents act as guarantors and/or clean out their savings, while some take second mortgages to ease their offspring into home ownership. And they’re doing it in ever increasing numbers: in the UK, in 2017, parents lent a staggering $NZ12.66 billion to children buying their first homes, a 30% increase on the previous year. All up, it’s estimated this year the UK Bomad will support the purchase of $NZ14.6 billion worth of property, making it the country’s ninth-largest mortgage lender (there’s even a BBC reality show called The Bank of Mum and Dad that follows families as they learn the tricky steps to the lending/buying dance).
Across the ditch, it’s a similar story. Directly comparable figures aren’t available, but a 2017 survey by financial comparison website Mozo put cumulative Australian Bomad advances at around $NZ71.29 million. According to economist Martin North, last year that accounted for around 52% of first-home buyers (up from just 3.3% in 2010), making the Aussie Bomad the country’s fifth-biggest lender. Of these lendings, 40% was for the deposit, while another 25% of transactions were to subsidise ongoing mortgage payments. Moreover, a whopping 67% of lenders said they didn’t expect to be repaid.
And it looks as though more first-home buyers than ever will be lingering at the parental tit: following Australia’s recent Royal Commission that uncovered misconduct in the financial services industry, the Reserve Bank of Australia has warned households might find it harder to secure loans as banks tighten their lending procedures.
Here in New Zealand, figures for parental lending aren’t kept, but estimates put the Kiwi Bomad as the sixth-largest lender to first-home buyers. A Bauer Media Insights North & South online survey of almost 1600 people in April found that 263 respondents had contributed towards a child’s home purchase. The average amount advanced was $90,000, with lending evenly split between loans and gifts.
Mark Collins, chief executive of Mike Pero Mortgages, isn’t surprised by these numbers. In some parts of New Zealand, his advisors are seeing anywhere between 60-70% of Kiwi first-home buyers seeking parental help. For those under 30, that number hovers around the 80-90% mark. ‘We’ve seen numbers jump dramatically over the past few years, particularly now that buyers need a 20% deposit,” says Collins. “Although we should bear in mind this is mainly an Auckland, Wellington or Christchurch issue, because it’s generally easier getting together a 20% deposit in the regions.”
Parental help often comes in the form of a loan on a “pay it back when you can” basis, although Collins has also seen instances of parents taking out reverse equity mortgages to free up lump sums, or investing in rent-to-buy arrangements or offset mortgages, where their savings can be offset against children’s borrowing, meaning interest is only paid on the difference.
Bruce Sheppard understands what drives parents to empty their bank accounts for their children. “You don’t want to see your kids living in cold, mouldy and unsuitable flats, paying someone else’s mortgage and worrying about being kicked out at any moment,” he says. “Parents who’ve had some degree of financial freedom naturally wish the same for their children.”
Fading in and out of the speaker-phone from his office high above Auckland’s Queen St, the founder of the Shareholders Association outlines certain speed humps parents should be aware of before they front up with the cash. “First, there’s the issue of equality, so if you give one child $200,000 towards their house, then five years later when your next child is buying their first house, should you give them then the same sum or increase it to adjust for rising house prices? If you’re going to do it for one child, then you have to be prepared to do it for the others.”
Sheppard also believes parents should get comfortable with the idea they’ll probably never see their money again. “Either your kids will say they can’t pay you back or they’ll return to Bomad for another withdrawal when they want to do renovations or upgrade to a bigger house. And because they’re your kids, you’ll roll over.”
Then there’s the possibility that if your child’s relationship splinters, you could lose your investment. “Unless it’s legally specified, after three years of a relationship everything becomes joint property. If your kid and his or her partner split, the ex could walk away with half your money.”
But Sheppard saves his strongest words for those thinking of taking out a loan to finance their children’s house buying. “Don’t do it! If you’ve got the means to be able to help your child then you should, but if you have to borrow to do so, that’s a bad idea. Your primary priority as you get older is to yourself and your spouse. Your kids should make their own way in the world.”
In the end, we spend three hours, split over as many days, untangling the story of how Hall came to lend James, the third of her five sons, $26,000 for the deposit on his Whanganui home. And then another $6000 a year later when he defaulted on his mortgage payments.
Her story goes like this: relocates from Auckland in 1996 with her five children when her marriage ends, buys a modest three-bedroom house near the Whanganui River and works in retail and book-keeping, often juggling two jobs. “I’ve worked really hard to raise five kids on my own and accumulate some savings,” she says proudly. Savings that would probably still be in her bank account were it not for the money she loaned James, then a 21-year-old chef, in 2004 for a house two streets from hers.
“The flat he was in was being sold and he thought he was too young to buy his own place. But when I showed him he’d pay less in a mortgage than in rent, it seemed like a no-brainer.”
Hall helped her son find the $240,000 house and lent him the deposit, left over from the sale of her South Auckland home. “It was a toss-up between paying down my own mortgage and helping my son. We’re a really close family and none of his siblings objected to me lending James $26,000.”
Even when she discovered he had a gambling problem that was gobbling his mortgage payments, “I had no idea he was in such financial strife. But I bailed him out days before the bank was going to sell his house. What else was I supposed to do?”
Other than a lump sum of $5000 a decade ago, Hall hasn’t seen a cent more of her money. “James has since gone farming up north with his partner and her two kids and is earning good money. He also spent $20,000 on a new car, motorbikes for the kids and has an overseas holiday every year. He still owns the house I helped him buy 14 years ago and apparently has bought another rental property. But despite his siblings and my ex-husband telling him to pay me back, he refuses.”
Hall has consulted a lawyer, but without a legal agreement she’s powerless to force her son to pay her back.
“We haven’t spoken for eight years, but he knows I’ve had to sell my house to pay my debts and all I can afford is a doer-upper in an undesirable neighbourhood,” says Hall, who relies on her credit card more than she should. “It’s caused me years of stress but that doesn’t seem to matter to him.”
Retirement Commissioner Diane Maxwell has a laundry list of such stories but says the overwhelming feedback from parents is they’re proud to help their children. “The older generation who’ve had such success with property, and may have also been burned in the sharemarket crash, see property as a superior investment,” she says. “They’ll generally do whatever they can to get their kids into a home.”
It doesn’t help that we’re all living longer, which means extended retirements. To pay for that, people are staying in the workforce longer and burning through their savings including, in some cases, home equity release mortgages.
“Parents are saying to their kids, it’s unlikely you’ll inherit a mortgage-free home when I die, but instead I can help you now: here’s a loan or a gift for the deposit of your first home.”
Like the 69-year-old Hawke’s Bay father who recently told Maxwell he’d kept driving taxis instead of retiring so he could give his daughter, a single mother, the deposit for her home. “He was happy to do so and felt he was making a positive contribution.”
Maxwell has also seen parents sell the family home to move into a granny flat or to the provinces, where it’s cheaper. That doesn’t always go well. “I know of one woman who sold her house to get her child onto the property ladder but only had enough left over to buy a caravan in an area she didn’t really want to be in.”
The key, says Maxwell – a mother of two – is to have a brutally honest conversation with your children about how you can help, and the expectations around that. “First, be clear about the kind of retirement you want and how you’re going to fund that. Then be clear about your children’s money management skills – they probably earn, or have the potential to earn, much more than you ever did, so make sure they’ll be responsible with your money.
“And finally, figure out if you’re giving them a gift or a loan that you want them to pay back. Seek independent advice and if you’re worried about the risk, get it legally documented.”
Where it can go wrong
“These agreements begin with the best of intentions, so often parties don’t believe they need to seek legal advice or document the agreement in the proper legal manner,” says Sutton. “But then the children’s relationship may split and the parents try to get their money back.”
Cue the mother, father, aunt, uncle and cousin of all legal battles, with the court having to decide what the parents’ intent was at the time the money was advanced – was it a gift or a loan? “Without proper documentation, that can be extremely problematic, cost thousands and take years to resolve.”
Sutton says such situations are on the rise, estimating around 20% of cases currently before the Family Court involve parents trying to recover their investment. “It happens a lot with recent Asian migrants, whose cultural belief might be that you lend your children money without documentation to support it. They often don’t realise that it doesn’t work like that under New Zealand law.”
Sutton points to a 2017 case where Chinese parents gave their daughter $335,000 to buy a house, without any documented evidence. When the daughter’s marriage broke up, their former son-in-law claimed the advance was a gift, not a loan. He refused to pay back his half of the money and the case wound up in the Wellington High Court. In the end, Judge Simon France agreed with the parents and said the money was intended as a loan.
“My advice would be for parents to have their own lawyer who can draw up an agreement that ring-fences the amount given, specifying that it is a loan – as well as any terms.”
This was published in the July 2018 issue of North & South.
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