Understanding the pitfalls of New Zealand's fifth largest lender

Here is an interesting one. Do you know who New Zealand's 5th largest lender is for owner-occupiers? One that is estimated to lend out a whopping $22.6 billion in the last year alone, according to Consumer NZ?

Here's a hint, it is not one of the large trans-Tasman banks!

If you haven't guessed it yet, the "Bank of Mum and Dad" firmly occupies this space and is a key component of many Kiwis' quest to gain a footing on the property ladder. While this is a successful route for many aspiring new homeowners, it can be fraught with perils and pitfalls that need to be carefully considered.

Most of the “Mum and Dad” lending is for deposits (61%), but for a more concerning 1 in 10 parents, their help can result in moderate to severe financial strain when things go wrong. In short, such lending needs to be carefully considered in advance, especially when it relates to your own genuine love and good intentions directed towards a family member.

Some key considerations

• Many seeking assistance from the "Bank of Mum & Dad" may be in a new or committed relationship. It is important to ask yourself what happens if that relationship was to end for your child & their partner?
  
• Are you intending to offer the money required as a gift or as a loan? What conditions are in place, like most other agreements in life, if things were to go wrong?
  
• What are the tax implications for parents or family trusts choosing to lend, while expecting to be repaid? Would you be choosing to charge interest or receiving a share of sales profits?
  
• If you are providing a guarantee, what steps should be in place to protect your own interests, assets and future retirement?
  

The "Bank of Mum & Dad" is destined to stay as one of the key steps to home ownership for young people, and is more likely to only grow in its demand in the years to come.

Getting some legal advice to consider your situation at an early stage is an essential step in ensuring the arrangement can be clearly laid out and understood. Protection can be gained through a contracting out agreement or loan agreement to ensure all parties have full knowledge and understanding of what they are entering into. 

Committing to a new home or loan is a big undertaking with big challenges, risks and great satisfaction for those that are in a position to extend this option.

If you are looking to provide funding to a family member, reach out to our team so we can help you with solutions for your unique situation. 

Learn more about the Bank of Mum & Dad in this Consumer NZ article.

Protecting what matters to you is important to us. Please reach out to us if we can assist with your legal needs.

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