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How To Be The Best Mum And Dad Bank

Seeing your kids off on their own property journey can be very rewarding, but if you are tempted to help there are some guidelines, writes Mark Withers.

By: Mark Withers

30 June 2022

The bank of mum and dad is said to now be the largest bank in NZ with many first home buyers turning to their parents to help them get onto the property ladder. There are many ways to approach the dilemma of how best to respond to the pressure of helping the kids into a property.

Common options include equity share, buying the property yourself and renting it to the kids for purchase down the track, guaranteeing their lending, or gifting and/or lending them the deposit.

So, what’s the best option and what are the key issues, tax and financial, to watch out for?

Firstly, let’s deal with tax. The bright-line rules have significantly altered the option list. Going onto the title and planning to transfer the property to children at a later date or even going on the title with them can have bright-line taxing issues if the titles are changed within the bright-line period

Family Trusts

While there is a main home exemption to bright-line, it is only available to the children if they are in fact the owners of the property and living in it.

Even in the context of a family trust, a main home exemption is only available if it’s the principal settlor of the trusts main home. The exemption does not extend to the kids, as beneficiaries living in the home. The principal settlor is the person who has settled the most amount of money onto the trust.

Even in situations where money is simply lent to kids, if they are required to pay interest on the loan the interest they pay is taxable income to the parents.

The kids, as borrowers, are required to deduct resident withholding tax from the interest payments if the annual interest bill exceeds $5000.

Having had the opportunity to observe many families dealing with the question of how to help the kids, I have come to believe the “Be the bank not the owner” model works best. Here’s why:

  1. Let the kids choose the house, its one of life’s great thrills, guide them on due diligence, but let them pick.
  2. If your kids are on the title without you they make the capital gain. This incentive to work and improve the property can spark a fire to grow wealth that will last a lifetime.
  3. Your child can claim the main home exemption to bright-line if the property is sold within the period.
  4. If you aren’t on the title, you are not asked to be jointly and severally liable for the mortgage.
  5. You can negotiate the terms of any “loan” with your children, dealing with issues yourself.

One Rull For All

Now, probably the most important aspect of helping the kids is the reality that you must be willing to do for all what you are willing to do for one, regardless of whether some of your kids are financially independent.

Don’t fall victim to pressure to help that would leave you financially vulnerable if you had to offer the same level of support to all the kids.

I believe the starting point in the process is to meet the children’s banker or broker and determine what their income level can support without the need for your guarantee.

Never Guarantee Debt

They must be solely responsible for their own mortgage. Your loan to them should simply make up the difference between the amount of debt they can service on their own income and the cost of the property.

If the amount of money they need from you to bridge the gap is too big, they must lower their entry level price point rather than you extend yourself beyond what you can afford.

At a minimum, establish the loan to them properly with a signed acknowledgement of debt. If you simply transfer them the funds, how will you ever prove whether it was a loan or a gift?

Potentially, negotiate a second mortgage ranking behind the bank to secure your loan if you can. If your kid is buying the property with their partner, never gift the money unless the partner and their parents are gifting the same amount. If the relationship fails, the partner will walk away not only with half the gain, but with half of your gift as well.

Financial Security

Seeing your kids off and away on their own property journey can be rewarding, but at this stage in your life you are entitled to your own financial security. Don’t jeopardise this if you can’t afford it.

Take legal and accounting advice and, of course, if the funds involved are trust money, involve your independent trustee in the planning. Your trustee can be a very useful ally if you need to curb your kids’ expectations as they can act as a bad cop if you find yourself needing to say “no”.

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