The Bank of Mum and Dad: Helping First Home Buyers the Right Way
With property prices climbing far faster than wages in recent decades, many New Zealanders are turning to family for help to take their first step onto the property ladder. In fact, the so-called "Bank of Mum and Dad" has grown so large in recent years that it now ranks among the country’s largest sources of home loan support.
Whether structured as a gift, a loan, or something more creative, parental assistance has become a defining feature of modern home buying. But while family support can provide a critical boost, it needs to be done properly – and with open eyes.
A New Era of First-Home Buying
Back in 1985, the average house cost just 3.3 times the average salary. Today, that ratio is closer to 13.5. While interest rates are lower than they were in the 1980s, the size of deposits and loans required to buy a house today has made saving unaided near impossible for many. As a result, more families are stepping in to help.
This might take the form of gifting part or all of a deposit, lending money with or without interest, or even using their own home equity as security on a loan. But while the gesture is generous, it’s essential for both parents and buyers to be clear about how the support is structured.
Gift or Loan – What’s the Difference?
From a legal and banking perspective, there’s a world of difference between a gift and a loan. If parents are giving funds outright – with no expectation of repayment – it should be documented clearly as a non-repayable gift. Most banks will require a formal declaration confirming that no repayment is expected and that the funds are not a liability.
If the funds are a loan, even between family members, they must be treated like any other loan. That means agreeing on repayment terms, interest (if any), and consequences of default. This should be formalised in a written loan agreement, ideally drawn up by a lawyer. Banks will also take the repayment of this loan into account when assessing the borrower’s mortgage serviceability.
Not documenting this properly can create serious issues later – both for the borrower and their lender. It can also lead to misunderstandings within families, especially if circumstances change or relationships break down.
Other Ways Parents Can Help
While gifting or lending cash is the most direct form of support, there are other ways the Bank of Mum and Dad can assist:
Acting as a guarantor: Parents can use the equity in their home to guarantee part of their child’s loan. This carries risk, however – if repayments aren’t met, the guarantor is on the hook.
Shared ownership: Parents and children can co-purchase a property together. This is more complex and may involve a formal ownership agreement, but it allows for shared responsibility and flexibility.
Living assistance: Some parents provide low or no-rent accommodation to help their children save a deposit more quickly.
Offsetting: With some banks, parents can link their savings to their child’s mortgage account to help reduce interest payments, without physically handing over the cash.
Why Documentation Is Essential
It’s easy to assume that because support is coming from family, formal agreements aren’t necessary. But the stakes are high when it comes to property. Verbal agreements can lead to disputes, especially if relationships change or if the property is later sold or restructured.
In the case of a loan, documentation also protects parents from tax implications. If the loan is forgiven or interest isn’t charged, there may be gifting or income tax consequences to consider. This is why legal and financial advice is so important.
Even with a gift, it’s crucial to ensure banks are satisfied that the funds are truly not repayable. Otherwise, the lender might reduce the borrowing amount or require additional assurances.
Things to Discuss as a Family
If you’re considering helping – or being helped – by the Bank of Mum and Dad, here are a few key points to work through together:
Is the support a gift or a loan?
If a loan, what are the repayment expectations?
Are there legal documents in place?
How will this affect other family members (e.g. siblings)?
What happens if circumstances change?
Having open conversations early – before the property search begins – can save a lot of heartache later. A family meeting, with input from a mortgage adviser and solicitor, is a great place to start.
A Balancing Act
For parents, helping your children into their first home can be immensely rewarding. But it’s important not to compromise your own financial security, particularly as you near retirement. Before offering support, take a good look at your own budget, assets, and long-term goals.
For buyers, family assistance can be a game-changer – but it doesn’t replace the need to be financially prepared. You’ll still need to meet the bank’s criteria, manage your mortgage responsibly, and budget for the realities of homeownership.
Family help can fast-track your journey into the property market, but it’s not a shortcut – and it comes with strings attached if not managed carefully.
Making It Work for Everyone
Used wisely, the Bank of Mum and Dad can provide a powerful stepping stone for first-home buyers. But like any financial arrangement, it requires planning, honesty, and clear expectations. With the right structure and advice, it’s possible to strike a balance that benefits both generations.
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