The potential pitfalls to negotiate and avoid when making this big life decision.
With the cost of houses continuing to rise in New Zealand, it’s getting tougher for young people to buy their first home on their own. When your son or daughter is starting a family and looking to settle down, it’s natural that you’d like to help them on their journey to first-home ownership.
But what seems like a simple and generous offer can sometimes lead to bitter and unwelcome consequences if not clearly discussed and planned from the start.
At NZFP, Juliet Manning from the Christchurch branch has experience helping families to navigate the challenges of this situation. If you’re thinking of helping your children buy their first home, here’s what you need to consider before you say yes…
How will it affect your retirement or other long-term financial goals?
If you’ve had a financial plan for some time, as our clients have, you’ll be aware of how much you need to set aside in order to reach particular goals.
But when you want to provide a sizable sum to help your child buy a house, how much will that affect your ability to reach those goals?
You may realise you’ll have to stay in the workforce for several more years to make up the shortfall, or adjust your spending in retirement to ensure the new lower sum covers your needs for the rest of your life.
“The most important thing to understand is the impact this would have on your long-term planning and retirement. Once you understand what that impact is, you can start to look at the consequences and assess what actions you might need to take if you go ahead with it.”
“Some might say ‘That means I have to work for another five years, but I’m okay with that’. We work to get you that information so you can make those informed decisions.”
- Juliet Manning
Financial Adviser, NZFP
Is it a loan or a gift?
In some cases, parents will offer their help as an interest-free loan to be paid back as or when their adult child is able. What this vague payment schedule can often lead to, however, is the money not being paid back at all.
If you’re counting on your child paying back the loan and they never do, how will that affect your finances and your relationship? How comfortable would you feel chasing them to recoup the money?
Clarity is your ally in this situation, along with a lawyer and financial adviser.
Discuss openly and honestly what the two options would mean for you and your future – what are the conditions, consequences, and compromises that each option entails? How would your relationship with your child change in each situation?
A financial adviser will work with you to project the different outcomes from a financial perspective, while a lawyer would make sure that the right paperwork is completed so you, your child, and your money is protected.
Is it unfair to their siblings?
If you have more than one child, can you afford to help their siblings too?
While your other children may not be in a position yet to purchase a home, if your support is offered to one child but not their siblings it can cause intense feelings of resentment and bitterness within the family.
It’s important to discuss your decisions and the reasoning behind it as a family, to keep communication channels open and dispel any assumptions around favouritism before they begin.
What happens down the track?
To ensure that everything is properly recorded and protected, we recommend speaking to a lawyer who can help you draw up the necessary documents.
As well as recording the loan or gift from you, the parents, it’s important for your child to then know how to protect their asset in the event of a de facto relationship breakup down the track. Drawing up papers with the assistance of a lawyer can help to keep your child’s home safe, no matter what happens in years to come.
“If you’re helping your child into a house and their partner then starts living in the house, it’s important that your child has had the right legal advice and a heads-up about what that relationship could mean for the property.”
“If I give my child money to buy a house, then someone else comes in and a few years later they split up, the partner could be entitled to half the value of the house – that needs to be discussed and understood from the start.”
- Juliet Manning
Financial Adviser, NZFP
Secure your family with NZFP
No one can tell you what the future holds, but at NZFP we can help you prepare for both the planned and the unexpected. If you’d like to help your child into their first home, talk to us first to figure out what it means for your future.
Safeguard your investment and your family relationships with trustworthy financial planning.
