It is sometimes suggested that home ownership is now only a dream for many people, but there are still significant numbers of people in New Zealand becoming homeowners for the first time.
Reserve Bank data shows that first home buyers are accounting for an increasing share of new residential mortgage lending, with 26,500 first home buyers recorded in the 12 months ended December 2018. House prices have increased faster than the rate of increase in incomes, but low mortgage interest rates have helped with making it possible for more people to enter the housing market.
Ten years of saving through Kiwisaver and support measures, like the Kickstart grants and Welcome Home loans are helping, and some low income households are able to use the Accommodation Supplement to assist with mortgage payments.
It is hard to find any accurate statistics on the degree to which parents are helping their children into home ownership, but an article in Stuff in May 2018 suggested that half of all first-home buyers purchase properties with help from their parents. Some people believe that the amount of gifting is limited but the key limit applies in the period before you need to access residential care for yourself or your spouse. It is best to complete your major gifting well before then.
The main options for helping children into home ownership are:
This is a worthwhile option, even if the children have been able to save the 20 percent deposit required.
A few years ago we did the sums for a couple using a Crown mortgage calculator. We assumed the couple continued with the same weekly payments on their mortgage.
A $10,000 gift from the parents was used to reduce the balance owing on their mortgage. Even with our current low interest rates, the $10,000 gift saved the couple $40,000 in interest over the term of the loan, and shortened the time to pay it off.
A $20,000 gift would save $70,000 in interest. Regular small gifts to help them top up payments on the mortgage will also have long-term benefits if you don’t have a lump sum to gift.
This will have the biggest financial impact if it is able to be used to help them pay off their loan faster. It is important to have a loan document, even for a loan to your children, and to seek legal advice.
This has a similar benefit to an interest free loan but offers much greater flexibility. As parents, you keep full control over your money.
Three banks in New Zealand now offer offset mortgages.
These allow parents the opportunity to use their own funds to offset the interest that might be payable on their child’s mortgage. There are some benefits over the interest free loan option:
- The money you make available to be linked to the offset loan remains in your control and you can use it at any time. That means it is possible to commit all of your saving and the money in your day-to-day spending account to be offset against the mortgage. It would not be practical to commit the same level of support through an interest free loan
- The offset mortgage option has no establishment cost for you, while a large interest free loan is best provided through a secured mortgage, which involves legal fees. Moving your finances to the same bank as your child can happen very easily.
- Your child is not in debt to you. Being in debt to someone else does influence the relationship between the lender and borrower. With the offset mortgage, the bank sets the repayment terms and monitors that payments are being made, so you don’t need to worry about that.
Any savings accounts linked to an offset mortgage do not receive any interest payments. Banks currently charge a higher interest rate for offset mortgages. That means the weekly payments are higher than for a low interest fixed-term mortgage. However, if the interest on the mortgage is being offset, this speeds up the repayment of the mortgage, since more principal is paid off each week.
So how does the offset mortgage work? If your child has taken out a mortgage for $250,000 and you have a combined amount of $200,000 in your day-to-day spending and savings accounts, the bank charges interest on only $50,000. The following example is based on a 25-year mortgage for $250,000, which has an interest rate of 5.8%.
In the first week of the mortgage, the offset means $223.08 less is paid in interest and $223.08 more principal is paid off compared with the normal principal repayments.
Most parents will not have that much in savings, but even a much smaller amount can make a big difference on how long it takes to pay the mortgage off. If you have only a small amount that you can offset, most of the mortgage can be put into a lower interest fixed-term mortgage and a smaller balance kept on the offset loan.
An offset mortgage also allows your child to have money in a savings account for large one-off expenses, but the balance in their savings account is also offset against the mortgage.