Do You Support the Bank of Mum and Dad?

A few months back, I was speaking with a 19-year-old. They were working full-time and having the time of their life renting with friends and partying on the weekend — their plans went no further than one week ahead. I asked if they ever wanted to buy a home one day, and they shrugged it off. Unsurprisingly, it was not even on their radar. I asked them to look around. Houses are everywhere. And inside each house is someone who decided to buy it to live in or rent it out to someone like you.

As diplomatically as I could, I explained to this 19-year-old that I could see what their future might hold better than they could at this moment. I guided them through how to run a basic budget so they could start setting aside money to save for the home that, at this point, they didn’t even know they wanted. I told them what I told my daughter: You don’t see what you might need money for in the future, but I guarantee you that having some will come in handy. But you need to start saving a part of your income now.

Yet the reality is, that still might not be enough to get into your first home. If you feel comfortable enough to ask, and they are in a position to support you, you could think about approaching The Bank of Mum and Dad. It’s okay to ask for help! And I’ll bet that if a child has a track record of being as financially prepared as their situation allows, The Bank of Mum and Dad will be more likely to chip in. 

As a mother, would I consider helping my child into a home one day? 

Yes. 

But.

I’m already preparing for it, but I hope not to have to help. She and I need to be equally financially responsible in the years ahead. That starts with openly, honestly, and age-appropriately discussing money at home. Teaching her well will help her buy a home of her own. 

For those with a long runway like my daughter, I think raising the entire deposit for your own home one day is entirely possible if you are taught some basic money skills.

But for those without the benefit of financial education and guidance who find themselves trying to pull together a deposit for their first home, I think it’s entirely reasonable to approach The Bank of Mum and Dad. 

Get the basics right first

Buying a home is yet another predictable financial decision, like buying a first car, traveling, education, starting a business, or getting married. However, out of all our economic decisions, buying a home is likely to be the biggest and the one that takes the most planning as the prices climb ever higher. This is why it’s essential to get the financial basics under your belt.

• Know your net worth and track its growth monthly.
• Budget. Know where your income is coming from and going to.
• Earn more. Continue to strive for a better-paying job.
• Aggressively save. Automate this process so that you save first.
• Have an emergency fund both before and after you buy a home.
• Continue to save the minimum into your KiwiSaver and then save aggressively outside your KiwiSaver fund for your home. 
• Do your best to become debt-free. Take on no more debt and pay off the debts you already have because this frees up your income for saving for your house deposit.

Research your home options and get good advice

Find out what houses are selling for in the town you are looking to buy, do the math on those prices, and work out how big a deposit is required to purchase that home. Then consider your situation — at the rate you are saving, how close are you to this goal? Constantly adjust your course and your expectations to stay on track. Talk to a bank lender and get all the information early to help make sure you are looking good financially and are aware of any extra costs to buying a home that you might have overlooked.

Learn from others and find relatable first home buyer stories like these to glean ideas for building your home deposit: The Happy Saver Podcast and The Kiwi House Deposit. 

Talk to your family

Once you have complete oversight over your finances, have done some research, know how much you need for a deposit, you have a plan, yet find you can’t reach your goal alone, then are you ready to approach The Bank of Mum and Dad. 

When you do, try to understand their financial position, and don’t make them feel obligated to help you if it does not align with their goals. I speak with many people who have never discussed money within their families. When the conversation is finally broached, many children are shocked at their parent’s finances. This is why you need to talk to your parents early enough to see if you can factor them into your home ownership plans. 

Financial support can come in many different ways

Just like you are deciding how you spend your money, and they have no say over that, the same is true of theirs. If The Bank of Mum and Dad is not lending at this time, bring them into your team as mentors and DIY experts instead. Family help doesn’t need to just be transactional; it could look like any of the following:

• The option to live rent-free with your parents while you save.
• A top-up of your monthly savings towards your deposit.
• A gift that you do not need to pay back.
• Parents or a trusted family member acting as guarantor.
• Co-ownership of the property.
• Helping with loan repayments once the home is purchased.
• Either gifting a house already owned by the family.
• Lending the entire cost of the deposit.

What if they say yes to financial support?

Suppose they are in awe of your fiscal responsibility and are in a position to help you. I’ll tell you what they are worried about:

• Your partner, if you have one. What happens if you split?
• Your track record with money. Hence, you need to show them you are a good money manager.
• Not getting their money back when they need it.
• What might your siblings think?

Just like the bank has a lot of say in how you handle bank borrowed money, it should not come as any surprise that The Bank of Mum and Dad might be doing the same, tut-tutting at your choice of car, weekend getaway, or improvement made to the property — so be prepared to be examined and answer some tough questions.

Create a legally binding contract

If you have a parent willing to help you financially and you have bent over backward to show yourself and your parent that you have enough money smarts to be a worthy recipient, then take the opportunity, but go into it with your eyes wide open. If you do borrow or lend, get it legally documented all the way through. Just like a bank would. The bank is protecting itself, and you and your family should be too.

This episode of Consumer NZ’s podcast Consume This provides some excellent examples of the right and wrong ways to make an agreement between parents and children.

Giving or loaning money must be clean and traceable. If I had to have my parent’s ongoing involvement in my home (and potentially their point of view on the decisions I’m making), I’d rather have a black-and-white arrangement than a form of grey.

It would be a recipe for disaster if an unorganized home buyer collaborated with an equally disorganized parent to get into a home. Protect yourselves to prevent misunderstandings.

I’d prefer not to help, but I will if I have to

As a parent, I’ll do everything I can to educate my child so that she can save up the required deposit to buy her own house. If she has done everything right yet still doesn’t make it, I’ll help out. 

Because I have the idea that I might help my daughter with a home purchase, I’m already preparing for that distant reality. Just like I told her that it is worth saving just for the sake of, because you never quite know where money will come in handy one day, I’m doing the same. If she needs help, the money will be there; if not, I can redirect that money elsewhere. 

But, life evolves, and if helping her puts undue pressure on my financial situation, it’s not worth it. I’ll be putting my oxygen mask on first because she is no longer a child despite her being my child. 

I know, coming from a family of five children, opinions about money can change from person to person, with one person fully embracing family financial support (if it is available) and the other recoiling at the prospect because they are fiercely independent and want to go it alone.

For a person wanting to get into their first home, go out and earn your “I’m a financially responsible adult” stripes and wear them proudly. Learn how to make more, spend less and save the difference. Immense dignity and pride come from going it alone as an independent adult. Frugality, going without, and focused saving towards a substantial financial goal will feel much sweeter if achieved on your own. In all honesty, that is the path I want my daughter to take, and I’ll do everything I can to give her the financial knowledge to make that happen. I want to provide her with the tools to achieve such a massive goal and be there to guide her if and when she asks. 

Ultimately, I want her to be independent enough to do it on her own without the support of The Bank of Mum and Dad.

Ruth blogs at thehappysaver.com all about how she and her family handle money. What’s the secret? Spend less than you earn, invest the difference, avoid debt and budget each dollar that flows through your hands. She firmly believes that if you can just get the basics right, life becomes easier from there on in.