With banks operating stricter rules on lending, and property prices rising, many adult children have been leaning on the bank of mum and dad to give them a leg up on to the property market. So many, in fact, that the bank of mum and dad has been given an official name: Bomad.
In 2017, UK parents lent $NZ12.66 billion to children buying their first homes, a 30% increase on the previous year. All up, it’s estimated this year that UK Bomad will support the purchase of $NZ14.6 billion worth of property, making it the country’s ninth-largest mortgage lender. 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. Although there is no exact figures kept on this type of transaction in New Zealand, it is estimated that Bomad is the sixth biggest lender here. Pretty staggering figures!
Why do parents help?
Retirement Commissioner Diane Maxwell 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.”
Lending large sums of money to children was previously only done by the very wealthy, however now-days parents may keep working well past the retirement age to support their children, or may sell their own house and downsize to free up cash for their children’s deposit.
What are the risks?
The most common is confusion as to whether the money is a gift or a loan. Often parties do not believe that they need to seek legal advice or document the agreement in the proper legal manner. If the relationship goes bad this can make it very difficult for parents to recoup their money if they gave the money under the pretense that it was a loan. Auckland barrister Jeremy Sutton estimates that around 20% of cases currently before the Family court involve parents trying to recover their investment. This costs not only money but time.
If the money is deemed a loan, what about interest rates? More often than not the loan is interest free on and sometimes on a “pay back when you have extra money” basis. Like the issue above, if there is no legal agreement between parties it is hard to enforce repayments if relationships deteriorate.
The best idea, even if you do not believe a relationship could ever turn bad, is to get a lawyers advice and a contract drawn up “just in case.”
For more information about this issue, read this: The risks of opening an account with the bank of mum and dad
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